Diwali Bonus: Tax, TDS and the Deduction Deadline Employers Miss
- Statutory bonus is not discretionary — establishments with 20 or more employees owe a minimum of 8.33% to everyone earning up to ₹21,000 a month, payable within eight months of the year end.
- Bonus is taxed in the employee's hands when it is paid, not when it is declared, so a bonus declared in March and paid in April lands in the next year for them.
- The employer gets the deduction only if the bonus is actually paid on or before the income-tax return due date — provide it and pay it late and you lose the deduction for that year.
The Diwali bonus is treated in most small businesses as a goodwill payment decided a week before the festival. For a good number of them it is actually a statutory obligation with its own eligibility rules, its own minimum, and its own deadline — and the tax treatment contains one trap that costs the business real money.
Statutory bonus: who must pay it
The Payment of Bonus Act applies to factories and to establishments employing 20 or more persons. Once it applies, it keeps applying even if headcount later falls below twenty.
| Question | Answer |
|---|---|
| Who is eligible? | An employee drawing wages up to ₹21,000 a month who has worked at least 30 working days in the year |
| Minimum | 8.33% of wages — payable even in a loss-making year |
| Maximum | 20% of wages, depending on allocable surplus |
| Calculation ceiling | Where wages exceed ₹7,000 a month, bonus is computed on ₹7,000 or the minimum wage for the work, whichever is higher |
| Deadline | Within 8 months of the close of the accounting year |
| Disqualification | Dismissal for fraud, riotous behaviour, or theft or sabotage of the establishment's property |
Two points are regularly misunderstood. The 8.33% minimum is payable even if the business made a loss — it is a floor, not a share of profit. And a new establishment gets a limited exemption in its initial years, which is a timing concession rather than a permanent one.
How bonus is taxed for the employee
Bonus is salary. It is added to salary income, taxed at the employee's slab rate, and TDS is deducted along with regular salary TDS.
The timing rule is the one worth knowing: salary is taxed on a due or receipt basis, whichever is earlier, and in practice bonus is taxed when it is actually paid. A bonus declared in March but paid in April is therefore taxed in the employee's hands in the later year. This matters because an employee near a slab boundary can be pushed across it by a bonus landing in the wrong year, and because the amount will appear in the Form 16 of the year of payment, not of declaration.
For the payroll team, the practical step is to re-run each employee's annual projection in the month the bonus is paid. Deducting the whole year's shortfall in one month is legal but brutal on take-home pay; spreading the revised liability across the remaining months of the year is kinder and equally correct.
The deduction trap for the employer
This is where the real money is. Bonus is deductible for the employer only in the year it is actually paid, unless it is paid on or before the due date for filing the income-tax return for that year.
So the sequence that works is: provide for the bonus in the accounts at year end, and pay it before the return due date. The sequence that fails is: provide for it, carry the provision, and pay it the following December. In the second case the deduction is lost for the year of provision and only comes back in the year of payment — a cash-flow cost you created for nothing.
| Scenario | Deduction |
|---|---|
| Provided in March, paid in June | Allowed in that year — paid before the return due date |
| Provided in March, paid in December | Not allowed that year; allowed in the following year |
| No provision, paid at Diwali during the year | Allowed in that year |
The same principle applies to a number of other statutory dues, which is why a careful year-end review always includes a list of what is provided but unpaid.
What to do before you pay this year's bonus
- Confirm whether the Payment of Bonus Act applies to you at all — headcount of twenty is the test.
- List employees earning up to ₹21,000 a month with 30 or more working days, and compute the statutory minimum separately from any discretionary amount.
- Decide the split between statutory bonus and ex-gratia, and label each correctly in payroll. They are different things and an inspection will ask.
- Re-run TDS projections in the month of payment so there is no year-end shock.
- Put the payment date in writing and keep the bank proof with the computation — this is what protects the deduction.
- Register the payment in the statutory bonus register and file the annual return where required.
Common mistakes
- Treating statutory bonus as discretionary. Where the Act applies, 8.33% is a floor and a loss is not a defence.
- Providing for bonus and paying it after the return due date. The deduction is lost for that year.
- Not deducting TDS on bonus. It is salary; interest runs from the date deduction was due.
- Paying everything as cash "ex-gratia" to avoid records. It breaks the deduction, the PF position and the bonus register at the same time.
- Calling a bonus a gift. The ₹5,000 gift concession applies to gifts in kind; a cash payment is salary whatever it is labelled.
- Forgetting the ₹7,000 computation ceiling and paying 8.33% of the full salary, which over-pays and then confuses next year's working.
If the bonus run has left your quarterly TDS position uncertain, the TDS Services page covers monthly deposits, quarterly returns and Form 16 issuance. Professional fees there are exclusive of GST, government fees and out-of-pocket expenses at actuals.
Do it yourself in minutes — free to try, no login needed.
Open TDS Services →Frequently asked questions
Is Diwali bonus taxable in India?
Yes. Bonus is part of salary, taxed at the employee's slab rate, and the employer deducts TDS along with regular salary TDS. It is generally taxed in the year it is actually paid, so a bonus declared in March but paid in April is taxed in the following year.
Who is eligible for statutory bonus?
In an establishment covered by the Payment of Bonus Act — generally 20 or more employees — anyone drawing wages up to ₹21,000 a month who has worked at least 30 working days in the year. The minimum is 8.33% of wages and the maximum is 20%, with the computation capped at ₹7,000 a month or the applicable minimum wage, whichever is higher.
Does a loss-making company still have to pay bonus?
Yes. The 8.33% minimum is a floor payable regardless of profit or loss once the Act applies. Only the amount above the minimum depends on allocable surplus. Newly set-up establishments get a limited concession in their initial years.
When is the last date to pay bonus?
Within eight months of the close of the accounting year. Separately, for the employer to claim the income-tax deduction in the year the bonus relates to, it must actually be paid on or before the due date for filing that year's income-tax return.
General information for FY 2026-27, not professional advice for your specific case. Rules change — verify against the latest notification or ask a KyaTax expert.
Related: All free tools · More guides · Virtual CFO