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Types of Bonus in India

Indian employers can pay multiple types of bonus to their employees. Understanding the distinction is essential for both compliance and salary planning.

1. Diwali Bonus

The most widely recognized bonus in India. "Diwali bonus" is a colloquial term that usually refers to the statutory bonus paid around Diwali time, often combined with a voluntary ex-gratia amount. There is no separate legal provision for "Diwali bonus" specifically. It is the statutory bonus (and sometimes an additional festival gift) timed to coincide with Diwali celebrations. Most private sector employees and government staff receive this between October and November each year.

2. Statutory Bonus

Mandated under the Code on Wages, 2019. Every eligible employee earning up to ₹21,000/month (Basic + DA) in an establishment with 20+ employees must receive a minimum 8.33% bonus. The employer cannot skip this regardless of profitability. The maximum payable is 20%, depending on the company's allocable surplus.

3. Ex-Gratia Bonus

A voluntary payment made by the employer as a goodwill gesture. There is no fixed formula or percentage. Ex-gratia is common during Diwali, Pongal, Onam, Eid, and Christmas. It does not replace statutory bonus and is treated as a separate line item in the payslip. Many companies use ex-gratia to reward loyalty or celebrate festivals.

4. Performance Bonus

Tied to individual or team KPIs, targets, and annual appraisal ratings. Fully discretionary and varies widely across industries. Common in IT, BFSI, and corporate setups. Performance bonus is typically paid after the annual review cycle and can range from one month's salary to 20% or more of annual CTC. Use the incentive calculator to estimate performance-linked payouts.

5. Production-Linked Bonus (PLB)

Paid to central government employees, railway workers, and postal staff based on productivity metrics. The PLB amount is fixed each year by the government. For example, railway employees received a 78-day PLB of up to ₹17,951 in 2026, while postal employees received a 60-day PLB of up to ₹13,816.

6. Ad-Hoc Bonus

A non-productivity-linked bonus for central government employees (Group C and non-gazetted Group B) not covered under PLB schemes. The ad-hoc bonus for 2026 is ₹6,908 (30 days on a ceiling of ₹7,000/month). This is what most central government employees receive as their "Diwali bonus."

Understanding Bonus in India

Every year around Diwali, millions of employees across India receive a bonus from their employer. What most people call "Diwali bonus" is actually the statutory bonus mandated under the Code on Wages, 2019 (which replaced the Payment of Bonus Act, 1965 from 21 November 2025). The law requires every establishment with 20 or more employees to pay a minimum annual bonus to eligible staff.

On top of this legal minimum, many employers voluntarily pay an additional amount called ex-gratia or festival bonus as a Diwali gift. This is discretionary and varies by company. The key point: ex-gratia does not replace statutory bonus. Both are separate line items, and your employer must pay the statutory amount regardless of any voluntary festival gift.

• Statutory bonus: legally mandated, 8.33% to 20% of wages, payable within 8 months of the financial year end
• Ex-gratia (Diwali) bonus: voluntary, employer's discretion, any amount, typically given around Diwali
• Applies to: establishments with 20+ employees under the Code on Wages, 2019
• Eligibility: employee must earn up to ₹21,000/month (Basic + DA) and have worked at least 30 days in the year
• Deadline: statutory bonus for FY 2025-26 must be paid by 30 November 2026

How is Diwali Bonus Calculated?

The statutory bonus calculation uses your Basic Pay + Dearness Allowance, but with an important cap. Even if you earn more, the law caps the wage base at ₹7,000 per month (or the applicable state minimum wage, whichever is higher) for calculation purposes.

There are two critical salary ceilings to understand:

Statutory Bonus vs Ex-Gratia Bonus

This is the most common confusion around Diwali bonus. Here is a clear comparison:

Payroll software like Attendo automatically separates statutory bonus from ex-gratia in the payslip, so both the employer and employee have a clear record for compliance.

Diwali Bonus Payment Rules in India

Employers must follow specific rules when paying Diwali bonus to employees. Non-compliance can result in penalties under the Code on Wages, 2019.

Eligibility

An employee qualifies for statutory bonus if all three conditions are met: the establishment has 20 or more employees (10 or more for factories), the employee's monthly wages (Basic + DA) do not exceed ₹21,000, and the employee has worked at least 30 days in the accounting year. Employees dismissed for fraud, violence, theft, or sexual harassment conviction are disqualified. Contract workers, apprentices under the Apprentices Act, and employees of establishments with fewer than the threshold headcount are excluded.

Calculation

The bonus is calculated on the lower of actual wages (Basic + DA) or ₹7,000 per month, or the applicable state minimum wage, whichever is higher. The formula is: Annual Bonus = Calculation Wage x Months Worked x Bonus Percentage. The percentage ranges from 8.33% (minimum, mandatory even without profits) to 20% (maximum, based on allocable surplus). Pro-rata applies for employees who worked less than 12 months. Use the DA calculator to verify your Dearness Allowance component before computing bonus.

Minimum Wages and Bonus

If the applicable state minimum wage exceeds ₹7,000 per month, the bonus must be calculated on the minimum wage instead. For example, if the state minimum wage for your scheduled employment is ₹9,000/month, the calculation base becomes ₹9,000, not ₹7,000. This ensures that employees in states with higher minimum wages receive a proportionally higher bonus amount. Check the latest minimum wage notification from your state's labour department for the applicable rate.

Compliance

Employers must follow these compliance requirements under the Code on Wages, 2019:

• Payment deadline: bonus must be paid within 8 months of the accounting year end. For FY 2025-26 (April to March), the deadline is 30 November 2026
• Bank transfer only: bonus must be credited to the employee's bank account under Section 39(1). Cash payments are no longer compliant
• Form D filing: employers must file the annual bonus return (Form D) with the labour office within 30 days of payment
• Set-on and set-off register: maintain a record of allocable surplus carried forward (set-on, up to 4 years) or shortfall set off against prior surpluses
• Penalties: non-compliance attracts graded penalties under Section 54 of the Code on Wages, ranging from fines to imprisonment for repeat offences. Payroll tools like Attendo automate bonus calculation, deadline tracking, and compliance documentation

Tax on Diwali Bonus

Both statutory bonus and ex-gratia are fully taxable as "Income from Salary" under the Income Tax Act. There is no exemption or threshold for bonus income. Your employer calculates TDS by adding the bonus amount to your estimated annual salary and deducting tax at the applicable slab rate.

• Cash bonus: always fully taxable, no exemption regardless of amount
• Non-cash gifts/vouchers: tax-free up to ₹15,000 per year (updated from ₹5,000 effective April 2026). If total exceeds ₹15,000, the entire amount becomes taxable
• TDS: employer recalculates annual TDS including bonus and adjusts deduction accordingly. No separate TDS rate for bonus
• GST on gifts: no GST if employer gifts are under ₹50,000 per employee per year. Input tax credit on purchased gifts is blocked under Section 17(5)(h) of the CGST Act

Common Diwali Bonus Mistakes

Employers and employees frequently misunderstand bonus rules. Avoid these: