The Payment of Bonus Act, 1965 mandates that employers pay a bonus to their employees based on the establishment’s profits. The terms “available surplus” and “allocable surplus” are crucial in determining the amount of bonus payable.
Available Surplus
- It is the gross profits of an establishment for an accounting year after deducting certain specified sums.
- These specified sums are primarily prior charges like taxes, depreciation, certain other expenses, and all the sums specified under Schedule 3 of the Act.
- The available surplus is the foundation for calculating the bonus payable to employees.
Sum Deductible from Gross Profits
The following deductions are to be made from gross profit:
Tax-Related Deductions
- Any development rebate, investment allowance, or development allowance is deductible from income tax.
- Direct taxes are paid by the employer on income, profits, and gains during the year.
Other Specified Deductions
- Any amounts designated by the employer for deduction.
Depreciation
- Depreciation is calculated according to the Income Tax Act, 1961 or Agricultural Income Tax law.
Allocable Surplus
- It is a percentage of the available surplus that is allocated for bonus payments.
- The percentage varies based on the type of establishment:
- Banking companies: 60% of the available surplus.
- Other establishments: 67% of the available surplus.
- The allocable surplus is the amount that the employer is legally obligated to distribute as bonus to eligible employees.
Key Points to Remember
- The available surplus is the total pool of funds available for bonus payments.
- The allocable surplus is the portion of that pool that must be distributed.
- If the allocable surplus exceeds the maximum bonus (20%) payable to employees, the excess can be carried forward for set-on in future years.
- If the allocable surplus falls short of the minimum bonus (8.33%) payable, the deficiency can be carried forward for set-off in future years.
Download FORM A Computation Of The Allocable Surplus
FORM A – Computation Of The Allocable Surplus
Set On and Set Off under the Payment of Bonus Act, 1965
The Payment of Bonus Act, 1965, mandates employers to pay a bonus to their eligible employees. To ensure consistent and equitable bonus payments, the Act introduces the concepts of “set on” and “set off.” These terms refer to the carrying forward of excess or deficient bonus amounts between accounting years.
Set On
- Meaning: When the allocable surplus (the portion of profits available for bonus) in an accounting year exceeds the maximum bonus payable to employees, the excess amount is carried forward to the subsequent accounting year(s). This is known as “set on.”
- Purpose: To provide a buffer for future years when profits might be lower or bonus obligations might be higher.
Set Off
- Meaning: When the allocable surplus in an accounting year is insufficient to cover the minimum bonus payable, the deficit is carried forward to the subsequent accounting year(s). This is known as “set off.”
- Purpose: To ensure that employees receive the minimum bonus even in years of lower profits.
Download FORM B Set On And Set Off Of Allocable Surplus
FORM B – Set-On And Set-Off Of Allocable Surplus
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