A bonus, often viewed as a reward for exceptional performance, is pivotal in employee motivation and financial planning. Beyond an immediate financial incentive, bonuses can significantly impact an employee’s income, influencing savings and investment strategies.
Understanding the taxation of bonuses becomes essential. This article will discuss bonuses and their tax implications, provide an example to explain their calculation and help with financial planning.
What is a Bonus, and How is it Different From Salary?
A bonus is a financial reward given to an employee by an employer, often as recognition of the employee’s hard work, contribution to the company, or achievement of specific targets. Employers award bonuses on various occasions, such as during annual reviews, after project completion, or during festive seasons.
Bonuses are not guaranteed payments and can vary in amount depending on the company’s performance, the employee’s role, and other factors. In contrast, a salary is a fixed amount of money an employee regularly receives for performing their job.
Taxation on Bonus of Employees in India
When a bonus is paid, it is considered part of their total income and is taxable under the heading “Income from Salaries.”
When is Tax Deducted on Bonus?
When the bonus is paid to the employee, the employer deducts tax on a bonus at the source (TDS—Tax Deducted at Source). The employer calculates and withholds the tax before the bonus is credited to the employee’s account.
Suppose a bonus is paid at the beginning or middle of the fiscal year. In that case, the employer may adjust the TDS deductions on the employee’s remaining salary payments in that financial year based on the increased income due to the bonus.
How Employers Deduct Tax on Bonus Under Salary Head?
The tax rate applied to the bonus is determined by the employee’s total taxable income, including the bonus, and the applicable income tax slabs for the financial year. India’s tax structure is progressive, so higher income levels are taxed at higher rates.
When calculating the tax on a bonus, the employer will consider the employee’s total income, including the bonus, along with eligible deductions and exemptions under various sections of the Income Tax Act (such as 80C, 80D, etc.).
Note that if an employee receives bonuses from more than one employer in a single financial year, each employer will deduct tax on the bonus, considering it part of the salary they are paying.
Example For Tax Deduction on Bonus
Below is a simplified example showcasing how tax deductions on a bonus might work under India’s old and new tax regimes. This example assumes an annual salary of ₹7,00,000, with a bonus of ₹1,00,000, making the total income ₹8,00,000 for an individual below 60.
| Description | Old Tax Regime (₹) | New Tax Regime (₹) |
| Annual Salary | 7,00,000 | 7,00,000 |
| Bonus | 1,00,000 | 1,00,000 |
| Total Income | 8,00,000 | 8,00,000 |
| Standard Deductions | -50,000 | -50,000 |
| Deductions (80C, etc.) | -1,50,000 | 0 |
| Taxable Income | 6,00,000 | 7,50,000 |
| Total Tax | 32,500 | 30,000 |
| Cess (4%) | 1,300 | 1,200 |
| Total Tax + Cess | 33,800 | 31,200 |
Note that the tax rates applied are based on the financial year 2023-24 slabs. These rates can be amended with further Budget announcements.
Conclusion
In financial planning, bonuses can help accumulate wealth and enhance financial security. While bonuses offer a means to augment your income, recognizing their tax implications ensures that finances are managed more effectively. One more effective way is to invest the funds into market securities. Always seek guidance from a stock market advisory firm to ensure good returns.
Additionally, consulting with a tax professional can provide personalized advice and strategies to optimize your tax situation, especially when dealing with multiple income sources or complex financial scenarios.
Reference Links:
https://tax2win.in/guide/income-tax-on-bonus
https://www.fibe.in/blogs/bonus-taxability-steps-involved-in-calculating-the-tax-on-bonus-in-india/
https://housing.com/news/how-is-a-bonus-taxed-in-india/
https://www.99acres.com/articles/how-is-tax-on-bonus-calculated.html
