A bonus is a monetary compensation that employers pay to their employees over and above their annual salary. This incentive is often linked to employees’ performance.
However, like any other monetary compensation, a bonus is considered income under the Income Tax Law in India. Consequently, the bonus amount is added to your annual salary to arrive at your final annual income. The amount of tax deducted at source (TDS) increases if you receive a bonus on top of your salary. In this guide, we will find out how this additional income is taxed under the Income Tax Act.
How does a bonus impact your annual income? What impact does it have on your tax liability?
Income tax law in India classifies a bonus received from your employer as part of your salary. Therefore, this additional income is added to your annual receivables and tax is imposed on the increased income. Taxpayer sees a larger chunk of their payout getting deducted in taxes. The bonus may bring your annual income to a higher tax slab, attracting a higher tax rate.
How is TDS deducted from salary and bonus?
When an employer announces the bonus amount to be paid, the TDS calculation is done according to the final amount. For example, if your annual income is Rs 10 lakh and your employer has announced a Rs 1 lakh bonus, here is how the TDS will be deducted from your salary, both with and without bonus.
| TDS on annual income of Rs 10 lakh | TDS on annual income of Rs 10 lakh + bonus of Rs 1 lakh |
| Gross salary: Rs 10 lakh | Gross salary: Rs 11 lakh (10 lakh + 1 lakh) |
| Tax-free allowances: Rs 2 lakh | Tax-free allowances: Rs 2 lakh |
| Net salary: Rs 8 lakh | Net salary: Rs 9 lakh |
| Deductions under Section 80C: Rs 1.50 lakh | Deductions under Section 80C: Rs 1.50 lakh |
| Standard deductions: Rs 50,000 | Standard deductions: Rs 50,000 |
| Taxable income: Rs 6 lakh | Taxable income: Rs 7 lakh |
| Tax: Rs 1,2500 + 20% of 1 lakh = Rs 32,500 | Tax: Rs 1,2500 + 20% of 2 lakh = Rs 52,500 |
| Monthly TDS: 32,500/12 = Rs 2,708 | Monthly TDS: 52,500/12 = Rs 4,375 |
Change in tax if bonus increases the tax slab rate
Here is how the tax on your annual income will be calculated in case the bonus brings your income to a higher tax slab rate.
| Tax calculation on Rs 15 lakh salary | Tax calculation on Rs 15 lakh salary + bonus of Rs 3 lakh |
| Gross salary: Rs 15 lakh | Gross salary: Rs 18 lakh (15 lakh + 3 lakh) |
| Tax-free allowances: Rs 3 lakh | Tax-free allowances: Rs 3 lakh |
| Net salary: Rs 12 lakh | Net salary: Rs 15 lakh |
| Deductions under Section 80C: Rs 1.50 lakh | Deductions under Section 80C: Rs 1.50 lakh |
| Standard deductions: Rs 50,000 | Standard deductions: Rs 50,000 |
| Taxable income: Rs 10 lakh | Taxable income: Rs 13 lakh |
| Tax: Rs 1,2500 + 20% of 5 lakh = Rs 1,12,500 | Tax: Rs 1,2500 + 20% of Rs 5 lakh+ 30% of Rs 3 lakh = Rs 2,02,500 |
| Monthly TDS: 1,12,500/12 = Rs 9,375 | Monthly TDS: 2,02,500/12 = Rs 16,875 |
FAQs
What is a bonus?
According to the Income Tax Law in India, a bonus is a part of your salary, received in the form of an allowance, over and above your annual income.
Is the bonus taxable?
Yes, the bonus received in any form is fully taxable.
When is the bonus taxed?
Bonus tax is applicable in the financial year it is announced even though your employer may pay it next year. For example, your employer declares an employee bonus of Rs 1 lakh on March 15, 2024, to be paid on April 10, 2024. Your bonus amount will be deemed payable within FY24 and you need to pay the tax in the same year. In case, the exact amount is not revealed during the time of announcement, it will be taxed in the year in which you receive it.
Is a gift received from an employer taxable?
Gifts received from your employer are exempted if their value does not exceed Rs 5,000. Any gift beyond this value is included in your taxable income.
What is the difference between gross and basic salary?
Your salary has several components. The basic salary is the fixed amount which your employer pays you in exchange for your work. It does not include any fringes and perks or tax deductions. Your gross salary is the salary amount before any deductions. It includes all the components of your salary, barring pension fund contributions.
What is TDS?
TDS is short for tax deducted at source.
On what kind of payments is TDS deducted?
TDS is deducted from payments, such as interest, salary, rent, commission, bonus and sale proceeds.
Is bonus treated the same as salary for tax calculation purposes?
Yes, all payments received from an employer are reported under the heading ‘income from salary’.
| Got any questions or point of view on our article? We would love to hear from you. Write to our Editor-in-Chief Jhumur Ghosh at jhumur.ghosh1@housing.com |
