Over and above the normal compensation, an employee gets performance bonus based on his performance on a job during the financial year. It’s an excellent way to reward employees and motivate them to do more than the bare minimum.
These bonuses can have many components like it can be based on employee’s performance or industry performance or team performance. It can be a mixture of all these. Whatever be the way of calculating bonus, the tax calculation for all these will be the same.
As per the Indian tax law, bonus received by an employee from an employer will be considered as part of salary and such amount will be taxable in the financial year on due or receipt basis whichever is earlier. If bonus amount is declared during the financial year then it has to be considered for tax calculations even if it is not received by the employee. However, if you can prove that there were uncertainties on the payment or quantum of bonus and because of that you did not get it then bonus will be taxed in the year in which it is quantified or became certain for payment or received whichever is earlier.
Employer will add the bonus amount to your salary income and calculate income tax on the entire salary income by taking your tax deductions and other income as declared by you. Then the income tax will be divided by 12 to find out the tax liability per month that needs to be deducted from your monthly salary. While doing so if bonuses are received in the middle or at the end of the month then the extra tax as calculated in the above manner will be divided by the months that is left out and income tax per month as calculated will be deducted from your salary income.
Employers have to deduct tax as they deduct it in the case of employee’s salary. However tax rates on your bonus depends on your tax bracket. If adding this bonus component to your salary takes you from a lowed slab rate to a higher slab rate then higher tax rate will be applicable to you. For example; if the employee’s taxable income is Rs. 4, 90,000 then he is coming under the slab rate of Rs. 200000-500000 considering his age below 60 years. With annual bonus of Rs. 25, 000 employee’s income jumps from Rs. 4, 90,000 to Rs. 5, 15,000 by which such employee needs to pay tax at the rate of 20% on Rs. 15, 000 as this income comes under the slab rate of Rs. 5, 00,000 to Rs. 10, 00,000.
At the end of the year employees will be receiving form 16 for the entire amount including the bonus components and they just need to compare their tax liability with the TDS that has been deducted. If they find everything fine then tax return can be filled with tax department or else for lesser deduction of tax employee has to pay tax to the department and for higher deduction of tax employee will be claiming refund from IT department.