Tax on Bonus And Incentives in India: Everything You Need to Know

The Indian tax laws are made for the upliftment of the economy and individuals alike. There are approximately 24 million salaried employees in India (The World Bank), many of whom have commissions, bonuses, and incentives as an added perk in their paychecks.  

These added numbers work as the perfect carrot to motivate an organization’s workforce so that it’s aligned to the organization’s objective. But the question which comes to our mind is whether there is a tax on incentives, bonuses, gifts and if there is a tax on rewards. 

Managing incentives is a whole other ballgame as spreadsheet management is still used the most in their calculation. The funny thing is that users are least satisfied with spreadsheet management as a way to calculate incentives.  

This led to a transformation in the field, and various sales and channel incentive automation platforms have emerged since. Not only do they make the job easier and reduce errors but also bring in new dynamics with gamification and data analytics. 

However, both the employer and the employees have a question mark in their minds when it comes to how incentives and bonuses are taxed, and how sales commission(s), bonuses, and incentives are treated under the Indian tax laws when transacted through automated incentive payout.  

This blog will break down how bonuses are taxed, and what employers and employees need to know to plan ahead with clarity. 

What is an employee bonus? 

An employee bonus is a financial incentive offered over and above the standard salary to recognize and reward exceptional performance. Whether tied to festive occasions, year-end achievements, or standout contributions, bonuses serve as a powerful motivator.  

They not only boost morale but also drive employees to perform at their best and actively support the organization’s growth and goals. 

Are bonuses taxable in India? 
Yes, bonuses are fully taxable under Indian income tax laws. They are treated as part of an employee’s “Salary” income and taxed in the same financial year in which they are received. 

For instance, if you issue a bonus of ₹25,000 on December 15, 2024, it will be included in the employee’s taxable income for FY 2024-25. As the employer, it’s your responsibility to calculate and deduct TDS (Tax Deducted at Source) on this amount. The bonus details are usually included in the employees’ Form 16 along with regular salary components. 

When is bonus taxed? 

The tax on bonuses in India is calculated by adding the bonus amount to your total income for the financial year. This total income is then taxed based on the applicable income tax slabs. Here's how it works: 
 

1. Income tax on bonus: The bonus is added to your total annual income, and the aggregate amount is taxed according to the prevailing income tax slabs. 
2. TDS on bonus: Employers are required to deduct TDS on bonus payments. This deduction is done at the time the bonus is paid, based on the overall income of the employee, including the bonus. 

How is tax on a bonus calculated? 
Bonuses are taxed based on the applicable income tax slab of the employee. Here's how it works: 

1. Add the bonus to annual income: The bonus amount is combined with the employee’s total annual salary. 
2. Apply income tax slab rates: The combined income is taxed according to the slab rates relevant for that financial year. 
3. Account for deductions: Eligible deductions (under sections like 80C, 80D, etc.) can reduce taxable income. 
4. Calculate final tax: The tax is computed on the net taxable income, and TDS is deducted accordingly. 

Step-by-step tax calculation on bonus 

Let’s take a practical example to understand how tax is calculated on bonuses. 

Suppose an employee earns an annual gross salary of ₹10,00,000 and receives an additional ₹2,00,000 as a joining bonus. Since bonuses are considered part of salary income, the total taxable income increases accordingly. Here’s a step-by-step breakdown of how the tax on this bonus would be calculated: 

Step 1: Add bonus to total income 

Step 2: Apply tax slab rates 

Given the total income of ₹12,00,000, the applicable tax rates under the old tax regime for FY 2023-24 (AY 2024-25) are: 

• Income up to ₹2,50,000: No tax 
• ₹2,50,001 to ₹5,00,000: 5% 
• ₹5,00,001 to ₹10,00,000: 20% 
• Above ₹10,00,000: 30% 

Step 3: Subtract deductions (if applicable) 

If the employee is eligible for deductions under various sections of the Income Tax Act—such as: 

• Section 80C (e.g., EPF, PPF, ELSS, life insurance premiums) 
• Section 80D (medical insurance premiums) 
• Section 80TTA (interest on savings accounts) 

then the total taxable income could be reduced. This, in turn, would lower the tax liability. However, in this scenario, if no deductions are applied, the payable tax remains ₹1,72,500. 

Step 4: Deduct TDS 

As an employer, you are required to deduct the applicable TDS (Tax Deducted at Source) from the employee’s monthly salary based on this updated annual income. This tax must be deposited with the government on a quarterly basis, and the total amount deducted should be reflected in the employee’s Form 16 at the end of the financial year. 

How do employers deduct TDS on salary, including bonus? 

Your bonus amount is immediately added to your salary after your employer declares it. Moreover, your employer calculates the TDS on your salary which includes the bonus as well. As a result, the tax deduction rate is likely to increase. 

Refer to the chart below for a better interpretation of the tax on bonuses in India under both the new and old regimes: 

Simplify payouts and maximize tax benefits with Xoxoday Plum 

While bonuses and incentives are powerful motivators, managing their taxation efficiently can be complex. One smart way businesses can ease this burden—for both themselves and their employees—is by exploring smarter payout solutions like Xoxoday Plum’s multi-benefit card. 

The multi-benefit card is a digital-first, tax-optimized solution that enables companies to disburse multiple types of employee benefits—like meal allowances, fuel reimbursements, telecom reimbursements, gift vouchers, and more—through a single, easy-to-manage card.  

What makes it truly valuable is its potential to maximize employees' tax savings. Benefits disbursed via the Multi-Benefit Card can be exempt from tax up to prescribed limits under Indian tax laws, helping employees retain more of what they earn while ensuring full compliance for the employer. 

Instead of direct bonuses that are fully taxable, organizations can structure a portion of their reward programs through tax-exempt benefits. This creates a win-win: employees enjoy higher take-home benefits and employers foster greater satisfaction without additional cost burden. 

FAQ's