Taxability of Bonus: How are Employee Bonus Taxed?
Employees are often compensated with a bonus on their existing remuneration. This extra salary is paid on various parameters like an employee’s good performance or a company’s profit in a particular financial year. Further, bonuses are also paid during festive seasons. Therefore, you might feel confused about why the additional income is being taxed. Moreover, to understand the taxability of a bonus, one first needs to understand what a bonus is and how it is calculated based on the CTC of an employee.
Keep scrolling to know more about taxability of bonus and the rate of tax deduction!
What is a Bonus?
A bonus is a monetary compensation awarded to an employee in addition to his or her salary. Companies generally give the bonuses based on parameters like:
- Employees’ good performance
- On achieving targets
- Increase in the company’s overall profits
However, an individual’s bonus is added to one’s salaried income, and bonus becomes a taxable part of the CTC of an employee. Moreover, an employer can give bonus incentives like; cash, stock and stock options.
Also read: Section 48 of Income Tax Act https://navi.com/blog/section-48-of-income-tax-act/
Who is Eligible for a Bonus?
An employee becomes eligible for receiving a bonus when the following criteria are satisfied:
- When the employee earns up to or more than Rs. 21,000 per month.
- An employee has to work more than 30 working days in a financial year.
- The employee needs to engage in any work like skilled, unskilled, managerial, etc.
However, an employee is disqualified from receiving bonuses if found guilty of theft, misdemeanor, dishonesty, destruction of company property or sabotage.
When is the Bonus Taxed?
If the employer declares they will pay bonuses to their employees in a certain financial year, then the bonus is taxed in that financial year itself. For instance, an employee is awarded a bonus of Rs. 25,000 on 25th March but received the amount on 10th April in their bank account. In this case, the tax is deducted from the previous financial year when the employer declared the bonus.
Additionally, profits on sale of bonus shares are not taxable. Therefore, a company distributes bonus shares to their existing shareholders for free.
How Do Employers Deduct Tax on Salary Including Bonus?
When an employer announces a bonus reward to an employee, it is immediately added to the salary. Further, the employer calculates the said employee’s TDS on the salary, including the bonus. Additionally, the tax deduction rate will increase as it is calculated on salary and bonus.
Example of Computation of Taxable Bonus
| TDS before Bonus | TDS after Bonus |
| Gross Salary- Rs. 10 Lakh | Gross Salary-Rs. 10 Lakh |
| Net salary- Rs. 8 Lakh | Bonus- Rs. 1 Lakh |
| Less: tax-free allowances and incentives – Rs. 2 Lakh | Gross salary after bonus – INR 11 lakhs |
| Less: Standard deduction – Rs. 50,000 | Net Salary- Rs. 9 Lakh |
| Less: Section 80 C deductions – Rs. 1.5 Lakh | Less: tax-free allowances and incentives – Rs. 2 Lakh |
| Taxable wage – Rs. 6 Lakh | Less: Standard deduction – Rs. 50,000 |
| Tax payable – 12500 + 20% of 1 lakh = Rs. 32,500 | Less: Section 80 C deductions – Rs. 1.5 Lakh |
| TDS deducted every month = 32500/12 = Rs. 2708 | Taxable wage- Rs. 7 lakhs |
| Tax payable – 12500 + 20% of 2 lakhs = Rs. 52,500 | |
| TDS deducted every month = 52500/12 = Rs. 4375 |
How is Taxability of Employee’s Income Calculated if Bonus Increases the Tax Slab Rate?
In some cases, the bonus awarded to the employee increases the net taxable earnings of that employee. If this happens, the employer will deduct the TDS based on the higher tax slab rate instead of the previous rates.
Example
| TDS before Bonus | TDS after Bonus |
| Gross Salary- Rs. 13 lakhs | Gross Salary- Rs. 13 Lakh |
| Net salary- Rs. 11 Lakh | Bonus- Rs. 2 Lakh |
| Less: tax-free allowances and incentives – Rs. 2 Lakh | Gross salary after bonus – INR 15 lakhs |
| Less: Standard deduction – Rs. 50,000 | Net Salary- Rs. 13 Lakh |
| Less: Section 80 C deductions – Rs. 1.5 Lakh | Less: tax-free allowances and incentives – Rs. 2 Lakh |
| Taxable wage – Rs. 9 Lakh | Less: Standard deduction – Rs. 50,000 |
| Tax payable – 12500 + 20% of 4 lakhs = Rs. 92,500 | Less: Section 80 C deductions – Rs. 1.5 Lakh |
| TDS deducted every month – 92500/12 = Rs. 7708 | Taxable wage- Rs. 11 lakhs |
| Tax payable – 12500 + 20% of Rs. 5 lakhs + 30% of Rs. 1 lakh = Rs. 142,500 | |
| TDS deducted every month- 142500/12 = Rs. 11875 |
Also read: Income Tax Act, 1961: Overview, Tax Slabs and More https://navi.com/blog/income-tax-act-1961/
What are the Ways to Save Taxes on Bonus?
Every employee appreciates a good bonus. However, the bonus increases the income tax rates of the employee. Thus, when somebody receives a bonus, they try to look for ways to save the taxes levied on the bonus amount.
Further, the best way to reduce or save taxability on bonus is by making suitable investments. Here are different ways where one can invest to save taxes on bonuses:
Life Insurance- Individuals who pay a premium for life insurance policy can get a deduction of up to Rs.1,50,000 under section 80C of the Act. However, the maximum amount should be Rs.1,50,000 under section 80CCE.
Health Insurance- An employee who makes a payment of health insurance can get a deduction of Rs. 25,000 under section 80D of the Act. Further, if the policy is taken on senior citizens above the age of 60, the deduction will be Rs. 30,000.
PPF–The income tax department allows a deduction of Rs.1,50,000 if the individual invests up to Rs.1,50,000 in one’s PF account. Moreover, interest in PPF is compounded and varies every year.
ELSS– It refers to Equity Linked Saving Scheme. Companies that offer ELSS invest their funds on debts and equities. Further, the taxpayers are returned capital gains. Similarly, the maximum deduction offered here is Rs.1,50,000.
Donation– IT department offers a 100% tax deduction on the amount donated to a charitable cause. Further, a 50% deduction on tax is offered when somebody donates to charitable institutions and NGOs.
Final Word
Bonuses are always taxable; however, one can save taxes or reduce the taxability of bonus if one adopts the above-stated investment methods. Further, if the employee can anticipate that the tax rates will reduce in the next year, then they can request their employer to give them a bonus in the next year.
FAQs on Taxability of Bonus
Ans. Yes, the employer provides a Form 16 to all their salaried employees.
Ans. Bonus is taxed under the “income from salary” head.
Ans. The computation of taxable bonus with the formula Bonus= Salary x 8.33 / 100. However, the salary needs should be equal to less than Rs.7000.
Ans. A bonus is a one-time payment, whereas a salary increase refers to a permanent increase in an employee’s monthly remuneration.
Ans. 10% bonus is considered as a good bonus percentage.
Disclaimer
This article is solely for educational purposes. Navi doesn't take any responsibility for the information or claims made in the blog.
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