Bonus and Commission under Indian Labour Laws
Indian labour laws define bonus and commission as additional compensation paid to employees beyond their regular wages or salary. However, they are distinct in their legal framework, purpose, and basis of calculation.
Bonus
Employees receive bonuses, either as legal entitlements or as goodwill gestures. It can be classified into two types: Statutory Bonus and Ex-Gratia/Performance Bonus.
Statutory Bonus (As per the Payment of Bonus Act, 1965)
The Payment of Bonus Act, 1965 governs the payment of bonus to employees based on company profits and employee salary.
Applicability:
- Applies to all factories and establishments with 20 or more employees.
- Covers employees drawing a monthly salary of ₹21,000 or less.
- Employees must have worked for at least 30 days in the accounting year to be eligible.
Calculation:
- Bonus is calculated on a salary capped at ₹7,000 per month or the minimum wage, whichever is higher.
- Employers must pay a minimum of 8.33% in annual wages as a bonus, and they can pay up to 20%.
Time of Payment:
- The company must pay the bonus within 8 months of the end of the financial year.
Key Conditions:
- The Act provides a minimum and maximum limit for payment.
- Employers are not eligible to hire apprentices and interns.
- Employers must maintain proper records and submit annual returns.
Ex-Gratia or Performance Bonus (Non-Statutory Bonus)
The company may offer this type of bonus at its discretion. It may be given based on.
- Company profitability
- Employee or team performance
- Festivals (e.g., Diwali bonus)
- Management decisions or contractual terms
This bonus is not governed by the Bonus Act and is usually defined in company policies or employment agreements.
Commission
Companies pay employees a commission based on revenue, profit, or sales generated. It is most commonly seen in sales, insurance, and marketing roles.
Key Characteristics:
- Not a statutory obligation; based on employment contracts.
- Can be a fixed percentage or variable structure tied to performance.
- Defined in the appointment letter, sales agreement, or company policy.
Legal Aspects:
- Covered under general contract laws such as the Indian Contract Act, 1872.
- Also subject to provisions of the Shops and Establishments Act and the Industrial Disputes Act, 1947 if disputes arise.
- No legal cap or floor on the commission amount; it is negotiable.
Tax and Compliance:
- Commission is taxable under Income Tax Act.
- If considered part of basic wages, it may attract Provident Fund (PF) contributions, depending on its regularity and structure.
Key Differences Between Bonus and Commission
| Aspect | Bonus | Commission |
|---|---|---|
| Nature | Reward, fixed or discretionary | Performance-based incentive |
| Legal Backing | Bonus Act, 1965 | Employment contract or policy |
| Basis | Salary or wage | Sales or performance metrics |
| Applicability | Factory/establishments with 20+ employees | Mostly sales roles or target-based jobs |
| Mandatory | Yes, if under Bonus Act | No, unless contractually agreed |
