Guide to Computation of Allocable Surplus for Non-Banking Companies under the Payment of Bonus Act, 1965 - Part 1

Introduction to Allocable Surplus Calculation

In India, the Payment of Bonus Act, 1965 mandates that employers calculate and distribute a bonus to employees based on the allocable surplus from the company’s profits. For non-banking companies, it is vital to calculate the allocable surplus correctly for each financial year, ensuring compliance with statutory requirements.

The allocable surplus is computed based on the company’s gross profits for the financial year, adjusted for specific deductions under Section 6 of the Payment of Bonus Act. These deductions may include tax provisions, employee provident fund contributions, and other prescribed statutory payments.

Non-banking companies are required to allocate 67% of the available surplus towards the bonus pool, which is then distributed among eligible employees.

The bonus payment is traditionally made during festive periods like Diwali or Durga Puja or before the Income Tax Return is filed, with companies generally ensuring that the bonus is paid within 8 months from the close of the financial year. In practice, provisions for bonus are also made during the year, based on estimations of the allocable surplus.

Period of Calculation and Payment of Bonus

• Period for Calculation: The allocable surplus is calculated based on the financial year (April 1st to March 31st). The final calculation is done after the company’s financial statements are prepared and finalized. However, companies may provision for bonus during the year in anticipation of the surplus.

• Payment of Bonus: As per the Payment of Bonus Act, the bonus must be paid to eligible employees within 8 months from the end of the financial year (i.e., by November 30th for a financial year ending on March 31st). Companies generally prefer to pay the bonus during festive seasons such as Diwali or Durga Puja to enhance employee satisfaction.

• Provisional Calculation: Although the final allocable surplus is based on actual financials, companies often make provisions for the bonus in the interim period. This provisional calculation should be reviewed and adjusted when the final figures are available.

Steps for Calculation of Allocable Surplus

1. Gross Profits for the Year

• Action: Obtain the final Profit & Loss (P&L) statement for the financial year.
• Important Consideration: Ensure that the gross profits reflect all adjustments, including any changes in revenue or expenses at the year-end.

2. Deductible Sums under Section 6

• Action: Identify and deduct sums specified under Section 6 of the Payment of Bonus Act. These include:
  • Income tax provisions for the year.
  • Employee Provident Fund (EPF) contributions.
  • Gratuity provisions.
  • Other statutory deductions as prescribed.
• Important Consideration: Be thorough in reviewing the statutory dues and other deductions, as these directly affect the available surplus.

3. Available Surplus

• Action: Calculate the available surplus by subtracting the deductible sums from the gross profits.
• Formula: $$\text{Available Surplus} = \text{Gross Profits} - \text{Deductible Sums}$$
• Important Consideration: Verify that all statutory deductions have been accurately deducted to arrive at the correct available surplus.

4. Allocable Surplus Calculation

• Action: Calculate the allocable surplus by applying 67% of the available surplus (specific to non-banking companies).
• Formula: $$\text{Allocable Surplus} = \text{Available Surplus} \times 67\%$$
• Important Consideration: Double-check that the applicable 67% of available surplus has been correctly applied.

Excel Format for Calculation of Allocable Surplus

Sl. No.	Particulars	Amount (INR)	Calculation Formula	Checklist for Calculation
1	Gross Profits for the Year	[Amount]	Direct input from P&L	✓ Confirm with finalized P&L statement
2	Less: Deductible Sums (Section 6)	[Amount]	Direct input	✓ Include statutory deductions (PF, taxes, etc.)
3	Available Surplus	[Amount]	=Gross Profits - Deductible Sums	✓ Ensure deductions are correctly accounted for
4	Allocable Surplus (67%)	[Amount]	=Available Surplus * 67%	✓ Apply 67% for non-banking companies
5	Final Allocable Surplus	[Amount]	Use Line 4	✓ Verify final allocable surplus calculation

Checklist for Calculation of Allocable Surplus

1. Gross Profits for the Year:

   • Ensure that the final Profit & Loss statement is used for calculating the gross profits.
   • Confirm that all entries are accurate and final, with no adjustments pending.

2. Deductible Sums (Section 6):

   • Check for all deductions specified in Section 6, including taxes, employee provident fund contributions, and other statutory payments.
   • Ensure that these deductions are up-to-date and verified.

3. Available Surplus:

   • Confirm that the available surplus is correctly calculated by subtracting the deductible sums from the gross profits.
   • Ensure the final available surplus is in compliance with the provisions of the Bonus Act.

4. Allocable Surplus:

   • Verify that the allocable surplus is calculated as 67% of the available surplus, in line with the statutory requirement for non-banking companies.

5. Provisional vs. Final Surplus:

   • If provisional figures were used earlier in the year, ensure that they are updated once the final financial statements are available.

Draft Form A – Computation of Allocable Surplus

Form A
Computation of Allocable Surplus for the Financial Year [Year]

To,
[Name of the Company]
[Address of the Company]

Subject: Computation of Allocable Surplus for the Year [Year]

I, [Name of the Chartered Accountant], having been appointed as the statutory auditor of [Name of the Company], hereby certify that the allocable surplus for the financial year [Year] has been computed as follows:

Particulars	Amount (INR)	Remarks
Gross Profits for the Year	[Amount]	As per final P&L statement
Less: Deductible Sums (Section 6)	[Amount]	Includes PF, tax provisions, etc.
Available Surplus	[Amount]	Gross Profits - Deductible Sums
Allocable Surplus (67%)	[Amount]	Available Surplus * 67%

Certification

I confirm that the allocable surplus has been calculated in accordance with the Payment of Bonus Act, 1965 and applicable laws. The allocable surplus has been computed at 67% of the available surplus, and is being used for the purpose of determining the bonus payable to employees.

For [Name of the Firm]
[Name of the Chartered Accountant]
[Signature]
[Date]

Conclusion

The calculation of allocable surplus is a critical compliance requirement for non-banking companies under the Payment of Bonus Act, 1965. It ensures that the company fairly distributes a portion of its profits to employees as a bonus. While the final bonus payment must be made within 8 months of the close of the financial year, the provisioning for bonus should be done in advance, based on an accurate calculation of the allocable surplus. By following the steps outlined above and adhering to the statutory guidelines, companies can ensure compliance, transparency, and employee satisfaction.