Gratuity and Bonus Payments

These forms of compensation i.e. Gratuity and Bonus are often used to motivate employees, improve their morale, and increase their loyalty to the company. We will discuss their legal statutes in this Article.

Meaning of Gratuity

Gratuity is a sum of money paid by an employer to an employee as a token of appreciation for their services rendered to the company. The Payment of Gratuity Act, 1972, governs the payment of gratuity to employees in India. The act applies to every establishment that employs ten or more persons, and it mandates that employees who have completed at least five years of continuous service with an employer are eligible to receive gratuity.


An employee who has served for at least five years is eligible for the benefit. The completion of five years of continuous service is not needed if an employee's job is eliminated owing to death or disability to the extent that the person is literally unable to supply the required services. In the event of the employee's death, the gratuity payable to him shall be paid to his nominee.

However, if no nomination has been made, to his heirs, and where any such nominee or heir is a minor, the share of such minor shall be deposited with the controlling authority, who shall invest the same in such financial institution for the benefit of such minor. As per the Act, the employer must pay gratuity within 30 days of the employee's exit from the company, whether due to retirement, resignation, death, or disability.


The benefits under payment of Gratuity act are −

  • Tax benefits

  • Financial security

  • Token of appreciation and recognition

  • Retention factor

  • Boosting the employee’s morale and efficiency.

Meaning of Bonus

Bonus payments, are additional payments made to employees on top of their regular salary as a reward for their performance or as an incentive to motivate them to work harder. Bonus payments are usually discretionary, and employers are not legally required to pay bonuses to their employees, except in certain cases.

The benefits of bonus payments to employees are that they provide a tangible reward for employees' hard work and encourage them to perform better. Bonus payments can also help to boost employee morale and increase employee loyalty to the company.


Employees who meet the following criteria are eligible for bonus payments −

  • The employee must have worker for at least 30 days in a financial year.

  • The employee must have earned a salary or wage below the limit specified by the act. As of 2021, the limit is Rs. 21,000 per month.

  • The employee must not have been dismissed from service due to fraud, theft, or any other misconduct.

It is important to note that the eligibility for bonus payment is based on the length of service and the amount of wages earned by the employee during the financial year. The act mandates a minimum bonus payment of 8.33% of the employee's wages for the year, subject to a maximum of 20% of the employee's wages.


  • Financial Reward − Bonus payments are a financial reward for employees' hard work and dedication. They can provide a significant boost to employees' incomes, allowing them to save more, invest in their future, or spend on other personal expenses.

  • Motivation − Bonus payments can be a powerful motivator for employees. By recognizing and rewarding their hard work, employees feel valued and appreciated, which can increase their motivation to perform well and contribute to the organization's success.

  • Loyalty − Bonus payments can also increase employee loyalty to the organization. When employees receive bonuses, they are more likely to stay with the organization and contribute to its long-term success.

  • Tax benefits − Bonus payments are usually taxable, but employees may be able to claim deductions and exemptions that can reduce their tax liability. For example, in India, bonuses up to a certain amount are exempt from tax.


In conclusion, both gratuity and bonus payments are important aspects of employee compensation, and employers must comply with the legal provisions and eligibility criteria defined by the Payment of Bonus Act, 1965 and the Payment of Gratuity Act, 1972, respectively. While gratuity payments provide financial security, recognition, and tax benefits to employees, bonus payments can motivate employees, improve their morale, and increase loyalty to the organization.

Therefore, employers must ensure that they provide fair and timely gratuity and bonus payments to their employees, as they are crucial for maintaining a motivated and dedicated workforce.

Frequently Asked Questions

Q1. Is there any limit on the amount of gratuity that can be paid to an employee?

Ans. Yes, there is a limit on the amount of gratuity that can be paid to an employee. As per the Payment of Gratuity Act, the maximum amount of gratuity that can be paid is Rs. 20 lakhs.

Q2. Is there any specific formula to calculate gratuity payments?

Ans. Yes, the formula to calculate gratuity payments is defined by the Payment of Gratuity Act. The amount of gratuity is calculated based on the employee's last drawn salary, the number of years of service, and the applicable gratuity factor.

Q3. Are all employers required to provide gratuity payments to their employees?

Ans. No, not all employers are required to provide gratuity payments. The Payment of Gratuity Act applies only to establishments with 10 or more employees.

Q4. Can an employee receive bonus payments for previous years?

Ans. No, bonus payments must be made for the financial year in which they are earned. However, employers may pay out unpaid bonuses from previous years if they choose to do so as a goodwill gesture.

Updated on: 09-May-2023


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