How to Calculate Bonus on Salary for Employees and Why is it Important?

Calculate Bonus on Salary

Bonuses, whether monetary or non-monetary, are additional payments from employers to employees along with their regular salary. These incentives are aimed at boosting morale, encouraging excellence, and commitment to the company. Understanding bonus calculations is essential for employees to get clarity on their compensation structure and any additional rewards they may receive. Moreover, understanding the various forms of bonuses and to how they’re calculated helps employees to make informed decisions and maximize their earnings potential.

Understanding Employee Bonuses

Bonuses are a type of compensation that employers offer to staff members who perform well all year long. This is awarded to employees as a token of appreciation, to recognize their accomplishments, which improves the employee performance. Employee bonuses inspire and motivate employees to meet organizational objectives. Rewarding staff is crucial for organizations because it helps them identify their finest workers and develop annual goals. Employee bonuses come in a variety of forms, such as spot bonuses, signing bonuses, retention bonuses, annual bonuses, and referral bonuses.

What is a Salary Bonus and Why is it Given?

A bonus on salary is an extra money that employers provide employees above their base salary in exchange for fulfilling performance targets, reaching milestones, or for other purposes as specified by the company. This increases output and motivates employees to achieve company objectives. When employees are motivated, they tend to perform better than ever. There are two major types of bonuses:

Discretionary Bonuses:

Discretionary Bonuses are ones that employees do not expect. These are the bonuses that come as a surprise. Employers primarily award these bonuses for excellent performance.

Nondiscretionary Bonuses:

Nondiscretionary bonuses are those that employers guarantee to pay to workers; these agreements are typically expressed in contracts. Employers are legally required to give employees a bonus if it is promised.

Importance of Bonuses to Employees:

Receiving bonuses and calculating bonus on salary is vital. Let’s discuss the Importance of bonuses to employees in detail:

Fair Compensation: 

Calculating bonuses ensures that employees receive fair compensation for their hard work and contributions to the company’s success.

Motivation and Engagement: 

Bonuses serve as incentives that motivate employees to perform at their best and remain engaged in their work, driving productivity and achieving organizational goals.


Offering bonuses based on performance can help retain top talent by recognizing and rewarding their efforts, reducing turnover rates and associated recruitment costs.

Performance Measurement: 

Bonus calculations provide valuable insights into employee performance, allowing employers to identify high performers and areas for improvement.

Goal Alignment: 

Bonuses tied to specific goals or targets align employee efforts with organizational objectives, fostering a results-driven culture and promoting accountability.

Financial Planning: 

Employees rely on bonuses for financial planning, such as saving for major expenses, investments, or retirement, making accurate calculations essential for their financial well-being.

Employee Satisfaction: 

Fair and transparent bonus calculations contribute to overall employee satisfaction and morale, enhancing workplace morale and fostering a positive company culture. 

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Benefits of Offering Employee Bonuses

Employee bonuses are not just extra perks handed out but also play an important role in encouraging employees for their hard work and contribution to the company. Offering bonuses has various benefits for both employees and employers. From boosting morale and productivity to fostering a sense of loyalty and commitment, employee bonuses act as a powerful tool to enhance overall employee well-being and organizational performance.

Let’s look deeper into the benefits that come with offering employee bonuses:

Increased Motivation: 

Employee bonuses are one of the effective methods to improve motivation among employees.  Employees put in a lot of effort and often go above and beyond to help the company reach its goals. This increases engagement, productivity, and job satisfaction among employees. Moreover, bonuses can help to create healthy competition among employees. This will promote improvement within the company, improving overall success and growth.

Lower Turnover:

Workers who feel valued and acknowledged by the organization are more likely to stick around for a longer amount of time. Bonuses reduce turnover and relieve the employer of the expense of hiring new employees. Providing incentives and retention bonuses enables the business to recognize the importance of its key employees.  Individuals who are hardworking and have the relevant skills and experience have an advantage over their competitors.

Encourages Healthy Competition Within the Workforce:

Bonus on salary encourages healthy competition among workers, which helps employers identify their best performers. Workers will always try to put in a lot of effort and be committed to receiving the bonus. Bonuses for employees can help the business achieve its objectives and promote a healthy competitive environment. Members of the team are forced to compete with one another, which shows dedication and strengthens the healthy team dynamic.

Encourages Team Collaboration:

All individuals strive to enhance their performance and accomplish their goals. Since all employees are working toward the same goals, achieving them will be made easier by working as a team. This encourages teamwork, and if the team performs well together, everyone wins. Consequently, this enhances team communication and gets rewarded by incentives and team bonuses.

How to Calculate Bonus on Salary for Employees?

Calculating bonuses can be confusing. An employee needs to understand all the deductions made or an additional amount given by the employer as it directly impacts on their overall compensation and financial planning. Here’s a step-by-step guide to help you through the process:

According to an amendment to the Payment of Bonus Bill (2015), If the gross salary of an employee is below Rs.21000, employers are required to pay bonuses. you can calculate bonus on salary as follows:

Consider your salary is equal to or less than Rs, 7000, then the bonus will be calculated on the actual amount using the formula 

Bonus = Salary x 8.33/100

If the salary is more than Rs. 7,000, then the bonus will be calculated on Rs. 7,000 with the formula:

Bonus= 7,000 x 8.33 /100

Also, you need to keep in mind that Salary includes (Basic Salary + Allowances)

For Example:

If Anil’s Salary (Basic + DA) is Rs. 10,000, then the bonus payable will be:

10,000 x 8.33 / 100 = Rs. 833 per month (Rs. 10,000 per year)

If Raj’s Salary (Basic + DA) is Rs. 8,500, then the bonus payable will be:

8,500 x 8.33 / 100 = Rs. 707.05 per month (Rs. 8,484.60 per year)

Calculate Bonus On Salary For Employees Considering Below Factors:

1. Though you may be aware of the calculation, but bonus calculations are dependent on different factors which are: 

2. Bonus eligibility is diverse, with some bonuses awarded passively, such as holiday bonuses.

3. Performance-based bonuses are commonly tied to exceeding expectations or achieving specific targets related to job responsibilities.

3. Salespeople, for instance, may receive bonuses based on the volume of sales they generate.

4. Employers may offer bonuses as a retention strategy for valued employees to incentivize them to stay with the company.

5. Bonuses can also serve as an expression of appreciation for employees’ contributions and dedication.

6. Overall, bonus structures vary depending on individual roles and company policies, with performance and value to the organisation being key determining factors.

7. One important piece of legislation that controls bonuses to employees in India is the Payment of Bonus Act, of 1965. This Act requires employers with 20 or more workers to offer yearly bonuses. Understanding the legal implications is vital for employers and employees alike to guarantee compliance and fair treatment. 

8. Employers with 20 or more employees are obligated to provide annual bonuses.

9. Bonuses should amount to 8.33% of the employee’s salary, capped at 20% of the total salary.

10. Prior approval is required for bonuses exceeding the statutory limit.

11. Bonus calculation is based on the employee’s basic wage, dearness allowance, and other fixed earnings.

12. Bonuses must be paid within eight months of the financial year’s closure.

13. Non-compliance can lead to penalties, including fines and legal action by affected employees.

14. Employers must adhere to the Act’s guidelines to ensure fair and lawful bonus distribution.

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How Are Bonuses Taxed?

The bonus amount is added to your base pay after your employer notifies you of it. TDS is calculated in addition to your compensation, which includes bonus as well. To further understand, you can refer to the chart below:


TDS on bonus

under old regime

TDS on bonus

under new regime

Gross Salary14000001400000
Less: Standard Deduction5000050000
Less: Other Exemptions2000000
Income from Salary11500001350000
Less: Deduction u/s 80c1500000
Total Income 10000001350000
Tax Liability117,000124,800
Monthly TDS

(117,000/12 months) 9,


124,800/12 months)10,400

Tips for Managing and Distributing Employee Bonuses

Here are some of the tips and managing employee bonuses efficiently:

Transparency: It is important to keep transparency about the bonus structure. Keeping communication clear and open is always appreciated by the employee.

Employee feedback: Taking employees’ feedback before making a decision helps to understand what employees are expecting and hence satisfying their expectations.

Alternative Method: Maintain a separate bonus payroll as an alternative if the integration is uncertain for smooth distribution.

Regular reviews: Assess the process to ensure its meeting both company and employee needs.

How Employee Bonuses Impact Morale and Productivity

Employee bonuses can have a significant impact on an employee’s morale and productivity by recognizing and rewarding good performance. These bonuses can drive employees to work towards corporate goals and strive for excellence, thereby contributing to the organization’s overall success. Employees are more likely to feel motivated and continue working toward company goals if they believe their boss recognizes and rewards their efforts. This will increase productivity, and job satisfaction, and increase employee loyalty.

Businesses should be upfront about their bonus structures to create confidence with one another, and employers should understand the criteria used to evaluate employee performance. While great achievers must be rewarded, it is equally critical to provide incentives to staff who performed well, met goal expectations, and showed improvement. The recognition makes employees feel valued. Apart from this, non-monetary bonuses such as prizes, thank you cards, and public recognition have a substantial impact on employee happiness.


Employee incentives are an important way to recognize employee performance. Employers can identify top performers and reward employees based on their capabilities by following an orderly strategy for calculating and distributing bonuses. Fairness and openness foster trust between the employer and employee, which benefits both parties.

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Frequently Asked Questions

How Is A Bonus Different From A Regular salary or Wages?

A bonus is an additional payment given to employees based on the employee’s performance, company profits, and other criteria, unlike regular salary or wages.

How Often Are Bonuses Typically Paid Out And Is There A Standard Timeframe?

Bonuses are usually paid out annually or semi-annually, although the timeframe can vary depending on company policy or industry norms.

What Is The Bonus Percentage In The salary of Employees?

According to the Payment of bonus act 1965, the bonus percentage in an employee’s salary pays a minimum bonus of 8.33% based on their total wages.

What Is The Minimum Basic salary for Bonus Calculation?

The minimum basic salary for bonus calculation may be determined by company policy, industry standards, or government regulations. Employers often use the employee’s base salary or wages as the starting point for calculating bonuses.

Is The Bonus Part Of The Gross salary of Employees?

Gross salary is the total pay an employee receives before any deductions are made. This includes regular wages, overtime, bonuses, commissions, and any other payments made to the employee.

What Is The Maximum Bonus Limit On The Salary Of Employees?

The bonus payable will be subject to a maximum of 20% of salary or wage.

What Is The Rule For Bonuses For Employees?

The Payment of Bonus Act, 1965 provides for a minimum bonus of 8.33 percent of wages.

What Is A Stock Bonus In salary?

A stock bonus in salary refers to compensation paid to employees in the form of company stock or equity rather than cash. 


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