The Payment of Bonus Act 1985 was introduced to ensure fair profit-sharing between employers and employees in India. It mandates that companies distribute a portion of their profits as bonuses to eligible workers. One of the Act’s critical concepts is allocable surplus, which determines how much bonus employers must pay.
Since profits vary from year to year, the law introduced set on and set off provisions to manage bonus payments consistently. These tools help businesses manage profit fluctuations while ensuring that employees receive their rightful bonus under the Payment of Bonus Act 1985.
What Is Allocable Surplus?
Allocable surplus refers to the portion of gross profits available for distributing bonuses after statutory deductions like taxes and depreciation. The law allows 60% of the available surplus for companies and 67% for others.
Once you calculate the gross profits and subtract necessary charges, what remains becomes the allocable surplus. This figure plays a major role in deciding whether an employer can pay the minimum bonus or more. The payment of Bonus Act 1985 uses this amount to activate either set on or set off, depending on the business’s performance that year.
This surplus ensures that bonus payments are based on real profit and not arbitrary decisions, making the system transparent and fair to all stakeholders involved.
Understanding the Set On Mechanism
Employers apply the set-on provision when the allocable surplus exceeds the maximum bonus limit of 20% of an employee’s wages or salary. In such cases, they do not pay the excess amount immediately but carry it forward for up to four accounting years.
If a future year sees a drop in profits, the carried-forward surplus can be used to ensure employees still receive their bonuses. This provision under the payment of Bonus Act 1985 protects workers from missing out during lean years.
In essence, set on creates a bonus reserve. It encourages responsible financial planning by employers and guarantees consistent bonus payments to employees even when annual profits decline temporarily.
Understanding the Set Off Mechanism
In contrast, set off comes into play when the allocable surplus is too low to pay the minimum bonus of 8.33%. In such cases, the employer cannot meet legal obligations, and the shortfall is recorded for future adjustment.
Employers carry forward the deferred amount and adjust it against future profits. When the company experiences a better financial year, they must first use the surplus to cover previous shortfalls. This rule under the payment of Bonus Act 1985 prevents employers from indefinitely avoiding their responsibilities.
Set-off ensures that employers eventually pay employees their dues, even if the company faces a bad year. It helps maintain a balance between legal compliance and business realities.
Key Differences Between Set On and Set Off
While both set on and set off belong to the same section of the Act, they function oppositely. Set on happens during high-profit years; it stores the excess surplus. During low-profit years, set-off records the shortfall that employers are responsible for paying later.
Set-on adds a credit for future bonuses; it allows employers to save the excess surplus. Set off is a debit that the company owes. Employers can carry forward both set-on and set-off for only four years. After that, unused amounts expire. The payment of Bonus Act 1985 mandates careful bookkeeping and accurate record maintenance for these provisions.
Understanding these differences is vital for employers to follow the law correctly and for employees to know their rights. Each has a unique role in the overall framework and ensures fairness in bonus distribution.
Which Provision Matters More in Practice?
Whether set on or set off holds more importance depends on the financial condition of the business. Profitable companies benefit more from set on provisions, allowing them to secure surplus for less profitable times. This helps maintain regular bonus payments.
However, businesses facing economic challenges often rely more on set off provisions. It gives them breathing room to recover financially without violating the payment of Bonus Act 1985. They can defer payments but must still fulfill them later.
Both provisions are essential. Set on supports employees’ welfare, and set off protects employers from immediate burdens. They work together to create a balanced, sustainable system that can weather changing business cycles.
Legal Compliance and Documentation
Employers must maintain detailed records of allocable surplus calculations, set on reserves, and set off deficits. These records ensure transparency and accountability. Non-compliance with the payment of Bonus Act 1985 can result in penalties, audits, or employee grievances.
Companies are encouraged to have regular audits and updates to financial books to comply with the law. Accurate records also prevent disputes with employees over bonus payments. For large organizations, internal HR and finance teams often coordinate to manage these obligations.
Clear documentation helps both the employer and employee understand how and why a bonus was paid or deferred in any given year.
