Around Diwali, two different things get called the same word. One is a legal obligation with a formula, a ceiling and a deadline. The other is whatever the employer decides to give. Treating them as one is how businesses end up either underpaying a statutory entitlement or creating an expectation they did not intend.
Statutory bonus is payable to employees drawing wages up to Rs 21,000 a month who have worked at least 30 days in the accounting year, at a minimum of 8.33% and a maximum of 20% of wages, calculated on Rs 7,000 a month or the applicable minimum wage, whichever is higher. A Diwali bonus is discretionary and is not a substitute for it.
Not sure what you owe this season? WhatsApp us your headcount and wage bands and we will work out the statutory position.
Quick Summary
| Item | Statutory bonus | Diwali or festival bonus |
| Legal basis | Code on Wages, from 21 November 2025 | None. Employer discretion |
| Who qualifies | Wages up to Rs 21,000, 30+ days worked | Whoever the employer decides |
| Amount | 8.33% minimum, 20% maximum | Whatever is given |
| Calculation base | Rs 7,000 or minimum wage, whichever higher | Not applicable |
| Payable if the business made a loss | Yes, the minimum still applies | No obligation |
| Deadline | Within 8 months of the accounting year close | None |
💡 TaxKitab Tip: If you already pay a Diwali bonus, check whether it can be set against your statutory liability rather than sitting on top of it. Where a festival payment is made during the accounting year, the law contemplates adjusting it against the bonus payable for that year — but only if it is documented as such at the time. Pay it as an undocumented gift and you may find you owe the statutory bonus as well. One line in the payment record settles which it is. — Salary TDS, including on bonus, is covered section by section in our TDS & TCS Complete Guide (Rs 249)
Which Law Applies Now
From 21 November 2025, statutory bonus is governed by the Code on Wages, 2019, which subsumed the Payment of Bonus Act, 1965.
Notifications S.O. 4710(E) and S.O. 4711(E) dated 25 August 2026 address the wage ceiling and the calculation basis, and both take effect retrospectively from 21 November 2025.
The substance has largely carried over. The eligibility ceiling remains Rs 21,000 a month, the minimum remains 8.33% and the maximum 20%, and the calculation ceiling remains Rs 7,000 a month or the applicable minimum wage, whichever is higher.
Who Is Eligible
Two tests, and both have to be met.
Wages of Rs 21,000 a month or less, counting basic and dearness allowance rather than gross pay. An employee on Rs 26,000 gross with Rs 18,000 basic and DA is eligible; one on Rs 22,000 basic is not.
And at least 30 working days in the accounting year. Someone who joined in February has not worked 30 days in that year and is not eligible for it.
Designation does not decide eligibility. Permanent, fixed-term and contract employees are tested the same way, on wages and days worked.
How the Calculation Works
This is where most errors happen, in both directions.
Eligibility is tested at Rs 21,000. Calculation is done on Rs 7,000 a month or the applicable scheduled minimum wage, whichever is higher — not on actual wages where those are higher.
So an employee with basic and DA of Rs 18,000 a month is eligible, but the bonus is computed on the ceiling rather than on Rs 18,000. Computing on actual wages overpays; applying Rs 7,000 where the state minimum wage is higher underpays.
The minimum is 8.33% of the computed base, or Rs 100, whichever is higher. The maximum is 20%, payable where the allocable surplus supports it.
The Minimum Is Payable Even in a Loss Year
Worth stating plainly because foreign-owned subsidiaries and early-stage businesses consistently assume otherwise.
The minimum 8.33% is not conditional on profit. A business that made a loss still owes it to every eligible employee. Only the amount above the minimum varies with surplus.
When It Has to Be Paid
Within eight months of the close of the accounting year. For FY 2025-26, that means by 30 November 2026.
Many employers pay around Diwali because it is convenient and welcome. That is fine, provided the amount paid actually meets the statutory calculation for the employees who are entitled to it.
Registers and returns under the applicable rules follow the payment, so the payment date is not the end of the obligation.
Where the Diwali Bonus Sits
A festival bonus paid to everyone, including employees above the Rs 21,000 ceiling, is a discretionary payment. It creates no statutory entitlement by itself.
Two cautions. First, a discretionary payment made consistently for years can become an expectation that is difficult to withdraw, particularly where it has been referenced in offer letters or appraisal conversations. Second, paying a festival amount to an eligible employee does not discharge the statutory bonus unless it is documented as an advance against it.
If you intend a payment to count against statutory bonus, say so in the payment record at the time.
Tax Treatment
Bonus, statutory or discretionary, is salary income in the employee’s hands and attracts TDS under Section 192 in the month it is paid.
That matters in practice: a bonus paid in one month changes the projected annual income and therefore the TDS for the remaining months. This is the same mechanism that makes a payslip look different after a bonus. Employees who see a larger deduction after a bonus usually assume the bonus was taxed separately. It was not — the whole year was recalculated.
Frequently Asked Questions
Is a Diwali bonus legally required? No. A festival bonus is discretionary. Statutory bonus is the legal obligation, and it is a different thing.
Does an employee on Rs 25,000 basic get statutory bonus? No. Eligibility is capped at Rs 21,000 of basic plus DA. Anything paid above that is discretionary.
We made a loss this year. Do we still pay? Yes. The minimum 8.33% applies regardless of profit. Only the amount above the minimum depends on surplus.
Is bonus calculated on actual salary? No. It is calculated on Rs 7,000 a month or the applicable minimum wage, whichever is higher, even where actual wages are more.
By when must it be paid for FY 2025-26? Within eight months of the accounting year close, so by 30 November 2026.
Can a Diwali payment count towards statutory bonus? Only where it is documented as an advance against the bonus payable. An undocumented festival gift generally does not discharge the obligation.
Does bonus attract TDS? Yes, as salary under Section 192 in the month paid, which recalculates the projection for the rest of the year.
References
- Code on Wages, 2019 — Chapter IV, payment of bonus, effective 21 November 2025
- Notifications S.O. 4710(E) and S.O. 4711(E) dated 25 August 2026
- Payment of Bonus Act, 1965 — subsumed provisions on eligibility, calculation and timelines
- Income-tax Act, 1961 — Section 192
⚠️ The calculation basis under the Code on Wages has been the subject of differing professional views following the August 2026 notifications, and state rules vary. Confirm your own position with your advisor before computing this year’s bonus.
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