How is Bonus Taxed in India?
A bonus, whether performance-based, annual, or festive, is considered part of your salary income. It's added to your total annual income and taxed according to your income tax slab. There's no separate tax rate for bonuses.
Understanding Bonus Taxation
When you receive a bonus, your employer calculates TDS (Tax Deducted at Source) based on:
- Your total projected annual income (salary + bonus)
- Your chosen tax regime (old or new)
- Your declared deductions and exemptions
Important Note
Tax Rates for FY 2023-24
New Tax Regime (Default from FY 2023-24)
| Income Slab | Tax Rate |
|---|---|
| Up to ₹3,00,000 | Nil |
| ₹3,00,001 to ₹6,00,000 | 5% |
| ₹6,00,001 to ₹9,00,000 | 10% |
| ₹9,00,001 to ₹12,00,000 | 15% |
| ₹12,00,001 to ₹15,00,000 | 20% |
| Above ₹15,00,000 | 30% |
Old Tax Regime (Opt-in)
| Income Slab | Tax Rate |
|---|---|
| Up to ₹2,50,000 | Nil |
| ₹2,50,001 to ₹5,00,000 | 5% |
| ₹5,00,001 to ₹10,00,000 | 20% |
| Above ₹10,00,000 | 30% |
Plus 4% Health & Education Cess on total tax in both regimes
Example: How Bonus is Taxed
Let's understand with an example:
- Annual Salary: ₹12,00,000
- Annual Bonus: ₹1,50,000
- Total Income: ₹13,50,000
- Tax Regime: New
Tax Calculation (New Regime):
- ₹0 - ₹3,00,000: Nil
- ₹3,00,000 - ₹6,00,000: ₹15,000 (5%)
- ₹6,00,000 - ₹9,00,000: ₹30,000 (10%)
- ₹9,00,000 - ₹12,00,000: ₹45,000 (15%)
- ₹12,00,000 - ₹13,50,000: ₹30,000 (20%)
- Total Tax: ₹1,20,000 + 4% Cess = ₹1,24,800
The ₹1,50,000 bonus gets taxed at 20% (₹30,000) because your income is in the ₹12-15 lakh bracket.
Strategies to Reduce Tax on Bonus
1. Timing of Bonus
If your employer allows flexibility, receiving part of the bonus in the next financial year can help split the tax burden across two years.
2. Tax-Saving Investments (Old Regime)
- Section 80C: Up to ₹1.5 lakh in PPF, ELSS, insurance, etc.
- Section 80D: Health insurance premiums (₹25,000-₹1,00,000)
- Section 24: Home loan interest (up to ₹2 lakh)
- HRA: House Rent Allowance exemption
3. Choose the Right Regime
Calculate tax in both regimes. If you have significant deductions (home loan, HRA, 80C investments), the old regime might be better despite higher rates.
4. Salary Restructuring
Work with your employer to structure compensation with tax-efficient components like:
- Meal allowance (₹50/day tax-free)
- Telephone/Internet reimbursement
- Books and periodicals
- Employee Stock Options (ESOPs)
Common Mistakes to Avoid
- Assuming Separate Tax Rate: Bonus is taxed as part of salary, not separately
- Not Updating Form 12BB: Submit investment proofs to reduce TDS
- Missing Declaration Deadline: Declare tax regime choice at financial year start
- Ignoring Regime Comparison: Calculate both regimes before choosing
- Not Planning Investments: Make tax-saving investments before year-end
Remember
Bonus vs. Incentive vs. Commission
| Type | Nature | Taxation |
|---|---|---|
| Bonus | Annual/Performance bonus | Part of salary, taxed at slab rate |
| Incentive | Variable pay based on targets | Part of salary, taxed at slab rate |
| Commission | Sales-based earnings | Part of salary, taxed at slab rate |
| ESOP | Stock options | Perquisite + capital gains (complex) |
Frequently Asked Queries
What if I change jobs mid-year?
Provide Form 16 from previous employer to new employer for accurate TDS calculation. Otherwise, both will deduct TDS independently, leading to excess tax deduction.
Is joining bonus taxable?
Yes, joining bonus is fully taxable as salary income in the year you receive it.
What about retention bonus?
Retention bonus is also taxed as salary income. However, if received over multiple years, it's taxed in the year of receipt.