Tax on bonus in India: How TDS is calculated and deducted

Rewarding employees with bonuses is a great way to recognize their contributions and celebrate the company’s success. However, when it comes to income tax, bonuses are treated as part of an employee’s income and are subject to tax in India. This article breaks down how bonuses are taxed, why they’re considered additional income, and what employers and employees need to know to plan ahead with clarity.

Introduction to employee bonuses

An employee bonus is an additional monetary reward given to employees beyond their regular salary. These are awarded based on performance and can be given during festivals, at year-end, or in recognition of exceptional contributions. By providing bonuses, employers can motivate employees to excel in their roles and contribute more effectively to the organisation’s success.

Is a bonus taxable in India?

Yes, bonuses are taxable in India. The bonus you pay to employees counts as income under the "Salary" head and is taxed in the financial year it’s received.

For example, if you pay a bonus of ₹25,000 on December 15, 2024, it is considered part of the financial year 2024-2025, and tax must be paid for that year.

As an employer, you are responsible for calculating the tax on bonuses and deducting TDS (Tax Deducted at Source) accordingly. The bonus amount is typically included with the regular salary details in Form 16, which you provide to employees.

How is tax on bonus calculated?

Tax on bonus payments is calculated using the income tax slab rates set by the government. The bonus amount is added to the employee's total annual income and taxed according to their applicable tax rate. Here’s how you can calculate the tax on a bonus:

1. Add bonus to total income: Start by adding the bonus amount to the employee’s total income for the financial year.
2. Apply tax slab rates: Use the income tax slab rates based on the employee's total income, including the bonus.
3. Calculate tax liability: Determine the tax liability on the employee’s total income, now inclusive of the bonus, using the relevant tax rate.
4. Subtract deductions: Deduct any eligible exemptions or deductions to calculate the final tax amount.

Step-by-step tax calculation on bonus

Assume an employee with an annual gross salary of ₹10,00,000 receives a ₹2,00,000 joining bonus. This bonus will be added to his total income, impacting the total tax liabilities. Here’s a step-by-step example of how tax on the bonus is calculated:

1. Add bonus to total income:
   • Gross salary: ₹10,00,000
   • Joining bonus: ₹2,00,000
   • Total income = ₹10,00,000 + ₹2,00,000 = ₹12,00,000
2. Apply tax slab rates: The employee’s total income is ₹12,00,000, so we’ll apply the income tax slab rates based on this amount. Assuming they are under the old tax regime, the tax slabs for FY 2023-24 (AY 2024-25) are as follows:
   • Income up to ₹2,50,000: No tax
   • ₹2,50,001 - ₹5,00,000: 5%
   • ₹5,00,001 - ₹10,00,000: 20%
   • Above ₹10,00,000: 30%
   • Total tax on ₹12,00,000 as per these slabs = ₹1,72,500
3. Subtract deductions (if applicable): If the employee has eligible deductions under sections like 80C (e.g., investments in EPF, PPF, etc.), 80D (health insurance premiums), or 80TTA (savings account interest), they can reduce the taxable income, potentially lowering the total tax. However, without specific deductions, the tax liability remains ₹1,72,500.
4. Deduct TDS: Deduct the tax amount from the employee’s salary over the course of the financial year and deposit the deducted amount to the government through quarterly TDS payments.

How can you help your employees save tax on bonuses?

While receiving a bonus is always a moment of celebration, it can also lead to an increase in taxes for your employees. Fortunately, there are strategies to help minimise the tax burden on bonuses, and as an employer, you can guide your employees on some of these options:

House Rent Allowance (HRA):If your employees receive HRA, inform them that they may claim tax exemptions under Section 10(13A) of the Income Tax Act by applying this allowance toward rent payments.

Leave Travel Allowance (LTA):Encourage employees to use LTA for travel within India, which is eligible for tax exemption under Section 10(5) of the Income Tax Act.

Home loan interest: Educate employees about the potential deduction on home loan interest payments under Section 24(b), which is separate from their Section 80C deductions.

Life insurance premiums: Highlight the tax benefits of life insurance; premiums paid can be deducted under Section 80C of the Income Tax Act, up to the applicable limit.

National Pension System (NPS): Suggest investing in NPS, which allows an additional tax benefit of up to ₹50,000 under Section 80CCD(1B), in addition to the Section 80C limit.

Public Provident Fund (PPF) and Equity-Linked Savings Scheme (ELSS): Guide your employees to invest in PPF accounts and ELSS funds, both eligible for deductions under Section 80C up to a maximum limit of ₹1,50,000. These investments not only support financial planning but also reduce taxable income.

Donations: Educate employees about the tax advantages of charitable donations. Donations to specific charitable organisations qualify for a 100% tax deduction, while contributions to other approved institutions or NGOs are eligible for a 50% deduction.

Key takeaways

Understanding how bonuses are taxed in India is essential for employers managing employee compensation. Since bonuses are fully taxable, they can significantly increase an employee's overall tax liability. By guiding employees on eligible deductions and tax-saving instruments, you can help them maximise their earnings and reduce their tax burden.

Frequently asked questions