Circular No. 414

308. Bonus - Whether deduction under clause (ii), first proviso, is admissible if it is within the minimum 8.33 per cent of salary and maximum 20 per cent of salary as per limits laid down under the Payment of Bonus Act

What this is

Circular No. 414 was issued by the Central Board of Direct Taxes on 14 March 1985. Its subject is 308. Bonus - Whether deduction under clause (ii), first proviso, is admissible if it is within the minimum 8.33 per cent of salary and maximum 20 per cent of salary as per limits laid down under the Payment of Bonus Act.

What it does

Corrects the notion that bonus is deductible only at the minimum rate. Under the first proviso to section 36(1)(ii) the deduction for bonus or commission paid to an employee for services rendered is restricted to the amount payable under the Payment of Bonus Act, 1965, and that Act makes between 8.33 and 20 per cent of salary payable depending on the circumstances. Following Circular No. 287 dated 4 December 1980, the Board states that the deduction is not necessarily confined to the minimum of 8.33 per cent in every case; whatever amount of bonus is payable in the particular case within those two limits under that Act is admissible under the first proviso.

Why it was issued

The earlier circular was being read as capping the deduction at the statutory minimum, and the Board had to say that the whole amount payable under the Act qualifies.

Who it reaches

Employers paying bonus above 8.33 per cent of salary
Assessing Officers restricting the bonus deduction to the minimum
Establishments covered by the Payment of Bonus Act, 1965

The provisions it speaks to

Left, the provision of the Income-tax Act, 1961 as the instrument itself names it. Right, the section of the Income-tax Act, 2025 that the department’s own concordance maps it to — which is where the same ground is now covered.

Under the 1961 Act	Now
s.36	s.2, s.29, s.30, s.31, s.32, s.66

The instrument, as the Board published it

The words below are the department’s own, reproduced from its published text. Where the department’s copy carried a publisher’s notes after the instrument, those are not reproduced.

308. Bonus - Whether deduction under clause (ii), first proviso, is admissible if it is within the minimum 8.33 per cent of salary and maximum 20 per cent of salary as per limits laid down under the Payment of Bonus Act
Reference is invited to Board’s Circular No. 287, dated 4-12-1980 [Sl. No. 307 ante]. Under first proviso to section 36(1)(ii) deduction for payment of bonus or commission to an employee for services rendered by him is restricted to the amount payable under the Payment of Bonus Act, 1965. Under this Act, a minimum of 8.33 per cent and a maximum of 20 per cent of salary is payable as bonus depending on the circumstances of the case. Deduction under first proviso to section 36(1)(ii) is not necessarily restricted to the minimum of 8.33 per cent of the salary in all cases. Whatever amount of bonus is payable in the case within these two limits under the Payment of Bonus Act, is admissible for deduction under the first proviso to section 36(1)(ii ).
Circular : No. 414 [F. No. 204/21/80-IT(A-II)], dated 14-3-1985.

What to watch

The ceiling is what is payable under the Payment of Bonus Act in the circumstances of the case, so the working under that Act has to be on the file.
Twenty per cent of salary is the outer limit the circular recognises; anything beyond is not saved by this note.
The provision construed is the first proviso to section 36(1)(ii) as it then stood, which is the restriction the circular's own text sets out.
The circular is about the amount, not about the year of allowance or the section 43B condition on actual payment.

Where you meet it

In a scrutiny assessment where bonus paid at, say, 12 per cent of salary is disallowed to the extent it exceeds 8.33 per cent.

On the same provision

Other instruments in this library that name the same provision of the 1961 Act. They are not necessarily still operative, and a later one may have replaced an earlier one without saying so.

Circular No. 14/2023 — Standard operating procedure SOP for making application for recomputation of total income of a co operative society enga 27 July 2023
Circular No. 18/2021 — Clarification regarding section 36 1 xvii of the income tax act 1961 inserted vide finance act 2015 25 October 2021
Notification No. 1 — Income-tax (First Amendment) Rules, 2009 - Insertion of rule 40E 5 January 2009
Notification No. 56 — For the purposes of the said clause notified under section 4 11 April 2008
Circular No. 3/2008 — Explanatory Notes to the Provisions of the Finance Act, 2007 12 March 2008
Notification No. 21 — For the purposes of the said clause notified under section 3 5 February 2008

← Circular No. 416 · Circular No. 415 →

A circular binds the department, not you and not a court. The Board issues a circular to its own officers. An assessee may hold the department to a circular that helps him; the department cannot hold an assessee to one that hurts him, and the Tribunal and the courts decide the law for themselves.

Source: the Income Tax Department’s own published text — its page for this instrument.