Variable pay and bonus: rules and tax

Updated 11 October 2026

"Bonus" covers two very different things. Statutory bonus is compulsory for lower-paid employees: 8.33% to 20% of wages a year, now under the Code on Wages, which replaced the Payment of Bonus Act, 1965. Variable pay is the performance-linked part of your CTC, set by your contract and company policy. Both are taxed as salary.

Statutory bonus: who gets it

• Who: employees whose wages are up to ₹21,000 a month and who worked at least 30 days in the accounting year, in factories and establishments with 20 or more employees.
• How much: at least 8.33% of wages or ₹100, whichever is higher, even in a loss-making year; at most 20%, depending on the employer's allocable surplus, a share of its profits.
• Wages for bonus: basic pay plus DA. If these are above ₹7,000 a month, bonus is worked out on ₹7,000 or the minimum wage, whichever is higher.
• When: within eight months of the end of the accounting year, so by 30 November for an April to March year.
• Who loses it: only employees dismissed for fraud, violent behaviour, theft, sabotage or sexual harassment. Resigning does not take away bonus already earned.

The ₹21,000 eligibility limit and the ₹7,000 calculation ceiling were notified under the Code on Wages on 25 August 2026 (S.O. 4711(E) and S.O. 4710(E)), effective from 21 November 2025. The calculation notice refers to the minimum wage fixed by the Central Government, and how that applies to employers under state jurisdiction is being debated, so practice may differ until it is clarified. The law is on the Ministry of Labour and Employment website.

Bonus for central government employees

Statutory bonus does not apply to central government departments. Instead, Group C and non-gazetted Group B employees who are not covered by a productivity-linked bonus scheme get an ad hoc bonus each year. For 2024-25 it was 30 days' emoluments with a monthly ceiling of ₹7,000, worked out as ₹7,000 × 30 ÷ 30.4 = ₹6,908, under an order of 29 September 2025. The order for each year usually comes out before Dussehra or Diwali, so check the latest one.

Variable pay in your CTC

Variable pay, also called performance bonus or performance-linked incentive, is often 5% to 20% of CTC in private companies, and more in sales and senior roles. Your offer letter shows the target amount; what you get depends on your rating, your team's and the company's results, and the plan's rules. It may be paid quarterly, half-yearly or yearly, so your monthly in-hand pay leaves it out.

• Check whether you must be on the rolls on the payout date; many plans pay nothing if you resign before it.
• Joining and retention bonuses often carry clawback clauses that require repayment if you leave within a set period.
• If you join mid-year, ask whether the first payout is pro-rated.

See CTC vs in-hand salary and the salary calculator.

How bonus and variable pay are taxed

Every kind of bonus is salary income, taxed at your slab rate in the year it is paid, or falls due if that is earlier. Your employer deducts TDS in the month of payment and re-estimates your tax for the year, so that month's take-home pay can drop sharply. Repaying a joining bonus later does not automatically reduce your taxable income.

To see the full picture for your salary, use the income tax calculator or the tax on a ₹20 lakh salary page, and read TDS on salary.

Questions to ask about an offer

• What share of the CTC is variable, and what did people actually receive in the last two or three years?
• When is it paid, and what happens if you leave before the payout date?
• Is any part deferred or paid in shares?

Statutory bonus is tied to the minimum wage, so see also minimum wages and the floor wage.