Employee Bonus Taxation - How is income tax calculated on Bonus?

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When is the bonus taxed?
How employers deduct TDS on salary including bonus
Taxability of salary if bonus increases the tax slab rate
How employers deduct TDS on salary including bonus
Frequently Asked Questions

Bonus received for the following reasons are fully taxable in your hands –

Performance linked bonus
Bonus for achieving the sales target
Bonus for increase in the rating of the employee
Bonus paid for incentive schemes offered by the employer

If you earn a bonus for any of these reasons, the bonus would be added to your salary income and form a part of your total taxable income. The rate of tax on the bonus would be equal to your tax slab rate.

When is the bonus taxed?

When a bonus is declared by the employer, it is considered taxable in the financial year in which it is declared even though you might receive it in the next financial year. For instance, if the employer declares an employee bonus of INR 50,000 on 24th March 2019 but the bonus is actually paid on 15th April, 2019, the bonus would be deemed to be received in the financial year 2018-19 and would be taxed in that year. However, if there is any ambiguity in the declaration of bonus or if the employer does not disclose the amount of bonus, the tax treatment would be different. If you can show that the bonus was not known in the financial year in which it was declared, the bonus would be taxed in the financial year in which it is received by the employee. For instance, the employer declared that a bonus would be paid to employees on 24th March, 2019. However, the rate of bonus was not declared and the actual bonus of INR 40,000 was paid on 5th June 2019. In this case, the bonus received would be taxed in the financial year 2019-20 and not in 2018-19 even though the bonus was declared in 2018-19.

How employers deduct TDS on salary including bonus

When the employer declares a bonus, the bonus is added to your salary. Thereafter, the employer does your tax calculation after including bonus in your salary. Based on the employer’s calculation of your tax liability, the TDS is deducted from your salary. As such, the rate of TDS deduction increases after bonus declarations because the employer also factors in bonus income in your salary.

Example

TDS before bonus declaration	TDS after bonus declaration
Gross salary – INR 10 lakhs	Gross salary – INR 10 lakhs
Less: tax-free allowances and perquisites – INR 2 lakhs	Add: Bonus – INR 1 lakh
Net salary – INR 8 lakhs	Total gross salary – INR 11 lakhs
Less: Standard deduction – INR 50,000	Less: tax-free allowances and perquisites – INR 2 lakhs
Less: Section 80C deductions – INR 1.5 lakhs	Net salary – INR 9 lakhs
Taxable salary – INR 6 lakhs	Less: Standard deduction – INR 50,000
Tax payable – 12500 + 20% of 1 lakh = INR 32,500	Less: Section 80C deductions – INR 1.5 lakhs
TDS deducted per month = 32500/12 = INR 2708	Taxable salary – INR 7 lakhs
	Tax payable – 12500 + 20% of 2 lakhs = INR 52,500
	TDS deducted per month = 52500/12 = INR 4375

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Taxability of salary if bonus increases the tax slab rate

In many instances it might so happen that the bonus declared by the company might increase your net taxable income and the increased income falls in the next tax slab. If that happens, the employer would deduct TDS at the increased tax slab rate and not the existing tax slab rate.

Gross salary INR 13 lakhs	Gross salary INR 13 lakhs
Less: tax-free allowances and perquisites – INR 2 lakhs	Add: Bonus declared – INR 2 lakhs
Net salary – INR 11 lakhs	Total gross salary – INR 15 lakhs
Less: Standard deduction – INR 50,000	Less: tax-free allowances and perquisites – INR 2 lakhs
Less: Section 80C deductions – INR 1.5 lakhs	Net salary – INR 13 lakhs
Taxable salary – INR 9 lakhs	Less: Standard deduction – INR 50,000
Tax payable – 12500 + 20% of 4 lakhs = INR 92,500	Less: Section 80C deductions – INR 1.5 lakhs
TDS deducted per month = 92500/12 = INR 7708	Taxable salary – INR 11 lakhs
	Tax payable – 12500 + 20% of 5 lakhs + 30% of INR 1 lakh = = INR 142,500
	TDS deducted per month = 142500/12 = INR 11875

So, even though the net salary, without bonus, was in the lower tax slab (between INR 5 lakhs and INR 10 lakhs), the bonus declaration placed the net salary in the higher tax slab (INR 10 lakhs and above). That is why, tax was calculated using the higher tax slab rate and TDS was deducted by the employer accordingly.

If the employer declares bonus in the middle of the year, TDS for the remaining months would only increase. The employer would calculate the TDS on the increased salary effective after the bonus has been declared.
So, understand the taxability of bonus and include it in your tax returns if you receive a bonus from your organisation.