Bonus Policy Template: Statutory and Performance Bonus

A bonus policy explains every bonus a company pays and how each is earned: statutory bonus for eligible employees under the Code on Wages, a performance bonus linked to company and individual results, and any festival bonus. Keeping them apart in one document avoids the common confusion over whether a Diwali payout counts towards statutory bonus, and tells employees exactly when and how each is paid.

When to use it: Use it before the first bonus cycle, when you change how performance bonuses are funded, or when employees ask why their Diwali bonus differs from a colleague's. Finance and HR draft it, and the directors approve the performance bonus pool and factors each year.

Bonus policy template

Copy the text below and replace everything in square brackets with your company details.

1. Purpose

This policy sets out the bonuses paid by [Company Name], who is eligible for each, how they are calculated and when they are paid.

2. Scope

It applies to all employees. Sales incentives are covered separately by the Sales incentive policy.

3. Statutory bonus

Employees eligible for bonus under the Code on Wages receive statutory bonus for each accounting year at not less than the minimum rate set by law, and up to the maximum the law allows, depending on the allocable surplus.
Statutory bonus is calculated on the wages and ceiling set under the Code on Wages. Where basic pay plus dearness allowance is less than half of total remuneration, the excess allowances are added back to wages for this purpose.
Eligibility, the minimum days worked, disqualifications and the payment deadline follow the Code on Wages and its rules.

4. Performance bonus

Employees at [grade] and above, and employees not eligible for statutory bonus, may receive an annual performance bonus.
The bonus pool is [Number] percent of [profit before tax], approved by the directors each year.
Individual bonus = target bonus of [Number] percent of annual basic pay x company factor x individual factor.
Individual factors: [Exceeds 1.2, Meets 1.0, Partly meets 0.5, Does not meet 0].
Example: a target bonus of ₹60,000 with a company factor of 0.9 and an individual factor of 1.2 gives ₹60,000 x 0.9 x 1.2 = ₹64,800.

5. Festival bonus

A festival bonus of [₹Amount or Number percent of monthly gross] is paid before [Diwali or the employee's chosen festival] to employees in service on [date].
Each year's payment letter states whether the festival bonus is paid in addition to statutory bonus or as an advance against it.

6. Joiners and leavers

The performance bonus is paid in [the month after the annual results are approved] to employees who completed at least [6] months in the year, pro rata for the months worked.
Employees who leave before the payout date [receive a pro rata performance bonus if the year was complete, or are not eligible].
Statutory bonus due to an eligible employee is paid as the law requires, whether or not the employee is still in service.

7. Payment

All bonuses are paid through payroll, shown separately on the payslip and subject to tax deduction as per income tax rules.

8. Responsibilities

Finance: compute the allocable surplus and the performance bonus pool, and confirm the statutory bonus liability.
HR: apply eligibility and individual factors, prepare bonus letters and answer queries.
Managers: complete performance inputs on time and explain outcomes to their teams.

9. Review

The directors approve the pool and factors each year, and HR reviews this policy whenever the bonus provisions of the Code on Wages or their rules change.

What to include

Statutory bonus kept separate

Keep statutory bonus in its own section and tie it to the law, not to performance. Read the bonus eligibility and calculation rules and record the rate and timeline your company follows.

The 50 percent wage rule

Under the Code on Wages, basic pay plus DA must be at least half of total remuneration, and allowances above that line are added back to wages. This can raise the bonus base, so check salary structures before calculating.

A transparent performance formula

Write the performance bonus formula with company and individual factors and a worked example. Employees accept a smaller bonus they understand more readily than a bigger one nobody can explain.

The status of festival bonus

Say whether the festival bonus is in addition to statutory bonus or an advance against it. Mixing the two without a written rule creates disputes in the year the statutory liability is worked out.

Joiners and leavers

State the pro rata rule for joiners and what happens to leavers before the payout date. These cases come up every year and should never be decided case by case.

Common mistakes to avoid

Treating a Diwali gift as statutory bonus without any written basis.
Paying performance bonus with no formula, so every payout looks arbitrary.
Calculating statutory bonus on basic pay alone when allowances must be added back.
Refusing statutory bonus to an eligible leaver because they left before the payout date.
Announcing the bonus pool before the accounts are final.

Run it in ZeniaHR

Direct Payroll in ZeniaHR supports a bonus run alongside regular and off-cycle runs, moving from draft to review to finalized, and a bonus can also be entered as a monthly payroll input. Every employee gets a payslip PDF, and the bonus and wages reports help HR check who received what. Weighted goal progress in Performance can inform the individual factor, while the pool and factors are decided outside the system.

Payroll Performance Policy settings

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Frequently asked questions

Is bonus mandatory in India?

Statutory bonus is governed by the Code on Wages, which sets who is eligible, the minimum and maximum rates and the timelines, so check whether your establishment and employees are covered. Performance and festival bonuses are company decisions. The bonus calculator helps estimate the statutory amount.

What is the difference between statutory bonus and performance bonus?

Statutory bonus is set by the Code on Wages for eligible employees and depends on wages and the company's allocable surplus, not on individual performance. A performance bonus is a company decision linked to results and ratings. The statutory bonus entry explains the term, and your policy should keep the two apart.

Is Diwali bonus the same as statutory bonus?

Not automatically. A Diwali or festival bonus is whatever the company decides to pay at festival time. Whether it counts towards statutory bonus depends on what the policy and payment letter say and on the adjustment rules under the Code on Wages, so state its status in writing every year.

Do employees who resign get a bonus?

It depends on the type. Statutory bonus due to an eligible employee for the period worked is paid as the law requires, even after exit. For performance bonus the policy decides: some companies pay pro rata to anyone who completed the year, while others require the employee to be in service on the payout date.