What is a Bonus?
Employers often provide employees with monetary compensation over and above their salary. Such compensation is known as a bonus. A bonus is provided to employees when -
- Their performance is good during the year
- They have achieved the targets given to them.
- There is an increase in the company's overall profits.
- The bonus forms a component of the employee’s salary and is taxable in the hands of the employee. This bonus can be given in the form of stock options, cash, etc.
Who is Eligible for a Bonus?
Employees are eligible for a bonus in the following cases -
- If any employee making not less than Rs. 21,000/- per month.
- If any employee works for not less than thirty days during a year.
- Any employee who is engaged in any type of work, including managerial, skilled, or unskilled.
Note:- Some employees might be disqualified from receiving a bonus under the Act for reasons like dismissal due to serious misconduct.
Minimum Bonus
Earlier, the maximum bonus payable was set at 20% of ₹3500 per month. The minimum bonus payment was constrained to 8.33% of ₹3500 or ₹100, whichever is higher. However, there has been a recent adjustment, doubling the calculation ceiling from ₹3500 to ₹7000 per month or the minimum wage for the scheduled employment, as determined by the government (whichever is higher). Consequently, the potential cost related to bonus payments may now double, contingent on the organization's performance.
Note: A minimum bonus is applicable irrespective of the company's profit or loss.
Payment of Bonus Act Relevance
The Payment of Bonus Act is applicable uniformly across all parts of India, and its provisions cover various establishments, factories, and companies, including:
- As defined under clause section 2 of the Factories Act, 1948.
- Any establishment where 20 or more workers are employed on any day during a financial year.
- The act is also applicable to certain public sector entities in specific cases.
- The provisions of this act extend to part-time employees as well.
When is the Bonus Taxed?
Tax on bonus in India is applicable on the financial year of its declaration, even though you might receive it in the next financial year. For instance, if the employer declares an employee bonus of INR 50,000 on 24th March 2023 but the bonus is actually paid on 15th April 2023, the bonus would be deemed to be received in the financial year 2022-23 and would be taxed in that year. However, if there is any ambiguity in the declaration of bonus or if the employer does not disclose the amount of bonus, the tax treatment would be different. If you can show proof of such ambiguity, the bonus is taxed in the financial year of its receipt. For instance, the employer declared that a bonus would be paid to employees on 24th March 2023. However, the rate of bonus was not declared, and the actual bonus of INR 40,000 was paid on 5th June 2023. In this case, the bonus received is taxed in FY 2023-24 instead of FY 2022-23, even when it was declared in 2022-23.
Note:-
- Your employer is responsible for including the bonus amount in your salary for tax calculations.
- They will deduct TDS (Tax Deducted at Source) on the combined amount (salary + bonus) before crediting it to your account.
- This deducted TDS will be reflected in your Form 16, which you'll use to file your income tax return.
Getting a bonus is exciting, but it can also bump you into a higher tax bracket, leaving you with less than you expected. If you are one of those who always get frustrated with taxes, our Tax Advisory Service is tailored to your specific needs.
How Employers Deduct TDS on Salary, Including Bonus
Upon the declaration of the bonus by the employer, it is added to your salary. Thereafter, the employer does your tax calculation after including a bonus in your salary. Based on the employer’s calculation of your tax liability, the TDS is deducted from your salary. As such, the rate of TDS deduction increases after bonus declarations because the employer also factors in bonus income in your salary.
Example
| TDS before bonus declaration |
TDS after bonus declaration |
| Gross salary – INR 10 lakhs |
Gross salary – INR 10 lakhs |
| Less: tax-free allowances and perquisites – INR 2 lakhs |
Add: Bonus – INR 1 lakh |
| Net salary – INR 8 lakhs |
Total gross salary – INR 11 lakhs |
| Less: Standard deduction – INR 50,000 |
Less: tax-free allowances and perquisites – INR 2 lakhs |
| Less: Section 80C deductions – INR 1.5 lakhs |
Net salary – INR 9 lakhs |
| Taxable salary – INR 6 lakhs |
Less: Standard deduction – INR 50,000 |
| Tax payable – 12500 + 20% of 1 lakh = INR 32,500 |
Less: Section 80C deductions – INR 1.5 lakhs |
| TDS deducted per month = 32500/12 = INR 2708 |
Taxable salary – INR 7 lakhs |
|
Tax payable – 12500 + 20% of 2 lakhs = INR 52,500 |
|
TDS deducted per month = 52500/12 = INR 4375 |
Taxability of Salary if Bonus Increases the Tax Slab Rate
In many instances, it might so happen that the bonus declared by the company might increase your net taxable income, and the increased income falls in the next tax slab. If that happens, the employer would deduct TDS at the increased tax slab rate and not the existing tax slab rate.
| Gross salary - INR 13 lakhs |
Gross salary - INR 13 lakhs |
| Less: tax-free allowances and perquisites – INR 2 lakhs |
Add: Bonus declared – INR 2 lakhs |
| Net salary – INR 11 lakhs |
Total gross salary – INR 15 lakhs |
| Less: Standard deduction – INR 50,000 |
Less: tax-free allowances and perquisites – INR 2 lakhs |
| Less: Section 80C deductions – INR 1.5 lakhs |
Net salary – INR 13 lakhs |
| Taxable salary – INR 9 lakhs |
Less: Standard deduction – INR 50,000 |
| Tax payable – 12500 + 20% of 4 lakhs = INR 92,500 |
Less: Section 80C deductions – INR 1.5 lakhs |
| TDS deducted per month = 92500/12 = INR 7708 |
Taxable salary – INR 11 lakhs |
|
Tax payable – 12500 + 20% of 5 lakhs + 30% of INR 1 lakh = = INR 142,500 |
|
TDS deducted per month = 142500/12 = INR 11875 |
So, even though the net salary, without bonus, was in the lower tax slab (between INR 5 lakhs and INR 10 lakhs), the bonus declaration placed the net salary in the higher tax slab (INR 10 lakhs and above). That is why the tax was calculated using the higher tax slab rate, and TDS was deducted by the employer accordingly.
If the employer declares a bonus in the middle of the year, TDS for the remaining months would only increase. The employer would calculate the TDS on the increased salary effective after the bonus has been declared.
Consider investing in tax-saving instruments like PPF (Public Provident Fund), ELSS (Equity Linked Savings Scheme), or NPS (National Pension System) to reduce your taxable income and potentially stay in a lower tax slab. Let’s discuss some of the tax savings investment:
What are the Ways to Save Taxes on Bonus?
While you might feel on top of the world after receiving a bonus, it also means higher taxes. But don’t worry; there are many ways in which you can save your taxes on bonuses. Given below are some ways in which you can minimize your taxes in bonuses -
- Life Insurance - If you purchase life insurance and pay a premium, you can get a deduction of the same upto a maximum of Rs.1,50,000 under section 80C of the IT Act.
- Health Insurance - The health insurance premium paid is deductible upto Rs.25,000 under section 80D. The health insurance premium paid for a policy taken on senior citizens above 60 years of age is deductible upto Rs.50000.
- PPF - Any investment made by the employee in the PPF account during the year is allowable as a deduction under section 80C of the IT Act, upto a maximum of Rs.1,50,000.
- ELSS - Any investment made in ELSS (equity-linked savings scheme) by an employee is deductible upto Rs.1,50,000 under section 80C of the IT Act.
- Donation - You can avail of a 100% deduction on any amount donated to a charitable cause. And a 50% deduction is given if the employee donates to a charitable institution or NGO.
Calculating taxes, paying them, and filing ITR can be scary and make you break out in a cold sweat. If you are also among those who feel intimidated at even the thought of doing your taxes yourself, then getting professional help is your best bet. You can hire an eCA from Tax2win and get end-to-end tax calculation and ITR filing services.
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