Important Definitions
Firstly, let’s understand the meaning of some terms used in Labor Act and Bonus Act
Basic Remuneration v. Remuneration
आधारभूत पारिश्रमिक
श्रम ऐन २०७४, दफा २(क): आधारभूत पारिश्रमिक भन्नाले रोजगारी बापत श्रमिकले पाउने आधारभूत पारिश्रमिक सम्झनु पर्छ र सो शब्दले रोजगार अवधि एक वर्षको पुगेपछि हुने पारिश्रमिक वृद्धिको रकम समेतलाई जनाउँछ ।
Labor Act 2074, Section 2(Ka): Basic Remuneration means the basic remuneration for employment received by the labour and the term shall also include annual increment in remuneration.
पारिश्रमिक
श्रम ऐन २०७४ दफा २(झ): पारिश्रमिक भन्नाले श्रमिकले पाउने आधारभूत पारिश्रमिक सम्झनु पर्छ र सो शब्दले भत्ता समेतलाई जनाउँछ।
Labor Act 2074 Section 2(Jha): Remuneration means the basic remuneration received by the labour and the term shall also include allowance.
खाईपाई आएको पारिश्रमिक भन्नाले आधारभूत पारिश्रमिक र भत्तालाई जनाउँछ। Remuneration & Allowance means basic remuneration and allowance. It has same meaning to the term Remuneration. Here, the word खाईपाई is used, to indicate that allowances to labour maybe in both cash or kind.
तलब वा ज्याला
वोनस ऐन २०३० दफा २(ङ) तलब वा ज्याला भन्नाले कुनै कर्मचारीले कुनै प्रतिष्ठानमा काम गरे बापत नगदको रूपमा भुक्तानी पाउन सक्ने कुनै किसिमको पारिश्रमिक सम्झनु पर्छ । तर, सो शब्दले बिजुली, पानी, औषधी, भ्रमण, बोनस, सञ्चयकोष वा अनुदान बापत कुनै कर्मचारीलाई प्राप्त हुने अरू कुनै रकमलाई जनाउने छैन ।
Bonus Act 2030 Section 2(gna): Salary or Wage means any kind of remuneration receivable by an employee in cash for the work done in an enterprise. Provided that, this term does not include any other amounts to be obtained by an employee for electricity, water supply, medicine, travel, bonus, provident fund or subsidies.
As per the above definition, Salary or Wage means remuneration but it excludes any allowance, bonus, or social security contribution. Essentially, Salary or Wage simply means Remuneration other than allowances.
Another important thing, the amount of Salary and Wages as per Bonus Act 2030, is the amount receivable (पाउन सक्ने) by an employee, so the attendance deduction is not made in this point.
Graphical Representation of Total Compensation
Total compensation is usually expressed in annual, gross terms. Total compensation is the total value of any or all benefits paid to employees. Remuneration is only one component of total compensation. Total compensation includes:
- Remuneration
- Basic Remuneration
- Base Salary
- Annual Increment
- Allowance
- Overtime Pay
- Basic Remuneration
- Bonus
- Social Security Contribution
Breaking down all forms of compensations under Labor Act
Let us list out and analyze all form of payments, other than basic remuneration, as per Labor Laws and other relevant prevalent laws to analyze the nature of the payment and decide if it is included in the term “Remuneration”:
सामाजिक सुरक्षा योगदान Social Security Contribution
Is it included in Remuneration?
No. Although it is not clearly stated in Labor Laws and Social Security Laws, it is understood from Section 25 of the Directive on Operation of Social Security Schemes 2075 and Section 52 & 53 of Labor Act 2075, that the contribution from employer towards Provident Fund / Gratuity / Social Security Contribution are made in addition to the remuneration of employee. Further, Remuneration is a payment tied to the service provided by the employee as per the employment agreement but, Social Security Contribution is a contribution made by employer intending to provide for the social security benefits of the employer.
Definition
Social Security Contribution is a contribution made by employer intending to provide for the social security benefits of the employer.
Taxability of Overtime Pay
As per Income Tax Act 2058 employers contribution to contributory social security plans like SSF constitutes employment income of the employee and are are taxable in their hands.
अधिलाभ
Is it included in Remuneration?
No. Although it is not clearly stated in Labor Laws, the term bonus and remuneration are entirely different terms. Salary is a payment tied to the service provided by the employee as per the employment agreement but, Bonus is a payment tied to performance of the employee in respect to the employer’s financial targets. Remuneration constitutes a part of entity’s fixed cost, but bonus is contingent upon the performance of employee and achievement of employer’s target.
Definition
Bonus is a payment tied to performance of the employee in respect to the employer’s financial targets. There are two forms of bonuses:
(1) Performance Bonuses
A performance bonus is a form of additional compensation paid to an employee or department as a reward for achieving specific goals or hitting predetermined targets. (e.g. Task Bonuses)
(2) Profit Sharing Bonuses
Profit sharing refers to various incentive plans introduced by businesses that provide direct or indirect payments to employees that depend on company’s profitability. (e.g. Statutory Bonus as per Bonus Act 2030)
Taxability of Bonus
As per Income Tax Act 2058 bonus constitutes employment income and are are taxable in their hands.
भत्ता Allowance
Is it included in Remuneration?
Yes, as per Section 2(Jha) of Labor Act.
Definition
Any monetary benefit offered by the employer to its employees for meeting expenditures, over and above the basic salary are known as allowances. The employers offer various kinds of additional benefits in monetary terms to their employees over and above the basic salary, which are known as salary allowances. These salary allowances are given to meet the expenditure of particular nature. Even in the case where, allowances aren’t directly offered as a monetary benefit along with the basic salary, but provided directly to the third party, (e.g. paying employee’s housing allowance directly to their landlord), it still counts as allowance, because in fact, the employee has derived the monetary benefit of such allowance in either way.
Taxability of Allowances
Some examples of various types of allowances are: Travelling Allowance (TA), Dearness Allowance (DA), Vehicle Allowance, House Rent Allowance, Outstation Allowance, Servant Allowance, City Compensation Allowance, Entertainment Allowance, Tiffin Allowance, Cash Allowance, Project Allowance, Conveyance Allowance, Medical Bills Reimbursement Allowance, Education Allowance. As per Income Tax Act 2058 allowances that are provided to employee are taxable in their hands. However, Vehicle Allowance and House Rent Allowance are only to the extent specified in Rule 13 of the Income Tax Rules.
चार्डपर्व खर्च Festival Expense
Is it included in Remuneration?
Yes. Essentially, the festival expense distributed under Section 37 of the Act is also a form of allowance, festival allowance. Hence, it is included in remuneration.
Definition
Festival expense pay is the one month basic remuneration received by the employee for every year at the time of celebration of the annual festival as per the employee’s culture and tradition.
Taxability of Festival Expense Pay
As per Income Tax Act 2058 festival expense pay constitutes employment income and are are taxable in their hands.
अतिरिक्त पारिश्रमिक Allowance Portion of Overtime
Is it included in Remuneration?
Yes but portion of overtime pay only but not the portion of overtime allowance. As per Section 31 of Labor Act 2074, it is implied that overtime pay is also a form of remuneration. The 0.5 part of the entitlement to 1.5 times of the normal basic remuneration is a form of allowance.
Definition
Overtime is the amount of pay received for works beyond normal working hours. As per Section 31 of the Labor Act 2074, employees are entitled to receive 1.5 times the normal basic remuneration as a overtime compensation.
Taxability of Overtime Pay
As per Income Tax Act 2058 overtime pay constitutes employment income and are are taxable in their hands.
प्रसूति बिदाको भुक्तानी Maternal Leave Payment
Is it included in Remuneration?
Yes. Essentially, the maternal leave payment made under Section 45 of the Act is also a form of allowance, a maternal allowance. Hence, it is included in remuneration.
Definition
Maternal leave pay is 60 days full remuneration received by the a pregnant employee as per provision under Section 45 of the Act.
Taxability of Maternal Leave Pay
As per Income Tax Act 2058 maternal leave pay constitutes employment income and are are taxable in their hands.
आधारभूत पारिश्रमिक
Is it included in Remuneration?
Yes, as per Section 2(Jha) of Labor Act.
Definition
Labor Act 2074, Section 2(Ka): Basic Remuneration means the basic remuneration for employment received by the labour and the term shall also include annual increment in remuneration.
The amount of increment in remuneration each year shall be equal to the half day’s remuneration of the concerned worker or employee. Meaning, with every passing year, a grade of Rs. (Basic Monthly Salary/30)×(1/2) is added to the monthly basic remuneration payment.
Taxability of Basic Remuneration
As per Income Tax Act 2058 basic remuneration constitutes employment income and are taxable in their hands.
अतिरिक्त पारिश्रमिक Wage Portion of Overtime
Is it included in Remuneration?
Yes. As per Section 31 of Labor Act 2074, it is implied that overtime pay is also a form of remuneration. The 1.0 part of the overtime is overtime pay (a form of remuneration) and the other portion 0.5 part of the overtime is overtime allowance (a form of allowance).
Definition
Overtime is the amount of pay received for works beyond normal working hours. As per Section 31 of the Labor Act 2074, employees are entitled to receive 1.5 times the normal basic remuneration as a overtime compensation.
Taxability of Overtime Pay
As per Income Tax Act 2058 overtime pay constitutes employment income and are are taxable in their hands.
घर / बिरामी बिदाको भुक्तानी Home/Sick Leave Payment
Is it included in Remuneration?
Yes. Although it is not explicitly indicated, as per Section 49 of Labor Act 2074, the payment for annual accrued home leave or sick leave is essentially a form of overtime payment. A employee who doesn’t utilize the normally accrued home / sick leave as a leave but attends to the employment is overtime in fact.
Definition
Where an employee has accrued home leave and sick leave in excess of the maximum reserve period under Section 49, he will be eligible to draw the payment for such accrued leave at the rate of his basic remuneration.
Taxability of Home/Sick Leave Payment
As per Income Tax Act 2058 payment for home/sick leave is also an employment income and are are taxable in their hands.
जगेडा अवधिको पारिश्रमिक Remuneration during Reserve Period
Is it included in Remuneration?
Yes. As per Section 39 of Labor Act 2074, it is essentially the normal remuneration payment to be made to the employee, only 50% of that amount by the reason of holding employee in reserve by the reason of occurrence of special obstructive circumstance in the employment. It has the portion of both basic salary and allowance.
Definition
In case where the curtailment of production or service in any enterprise for some period is necessary or where operation of the enterprise cannot be continued for some special circumstance, the enterprise may curtail its production or service or may keep employees on reserve with the condition of receiving half remuneration.
Taxability of Remuneration During Reserve Period
As per Income Tax Act 2058 remuneration during reserve period is also an employment income and are are taxable in their hands.
बेमौसमी अवधिको पारिश्रमिक Remuneration during Off Season Period
Is it included in Remuneration?
Yes. As per Section 89 of Labor Act 2074, it is essentially the normal remuneration payment to be made to the employee, only 25% of that amount by the reason of employee being on reserve during off-season period. It has the portion of both basic salary and allowance.
Definition
In case where the enterprise cannot operate during the off-season period, the enterprise may keep employees on reserve with the condition of receiving 25% of the normal remuneration.
Taxability of Remuneration during Off Season
As per Income Tax Act 2058 remuneration during reserve period is also an employment income and are are taxable in their hands.
Step by Step process of computing the Profit Sharing Bonus under Bonus Act 2030
Step 1: Set out the amount of bonus to be distributed
Section 5 of Bonus Act 2030 requires each profit making enterprise to allocate an amount equivalent to 10% of its net income (खूद मुनाफा) of one fiscal year for bonus to the employees.
So, what is net income / net profit?
Net income, also called net earnings, is calculated as sales minus cost of goods sold, selling, general and administrative expenses, operating expenses, depreciation, interest, taxes, employee incentives and other expenses. So generally, net income means the income after deduction of all expenses, including bonuses and taxes.
But, is net income as per Bonus Act 2030 same as general meaning of net income?
No, the net income as per Bonus Act 2030 is not same as general meaning of net income. Net income as per Bonus Act 2030 means the net income before statutory bonus and taxes. This is further clarified in Indushankar Chini Mill Labor Uninon v. Inland Revenue Department.
Maths:
Amount separated for the distribution of bonus = Net Income before Statutory Bonus and Taxes x 10%
In case of Government Owned Enterprise
As per Section 5 of Bonus Act 2030, the percentage of bonus and other matter relating to bonus which is to be distributed by the government owned enterprises shall be as determined by Government of Nepal.
Step 2: Decide the bonus percentage
Section 7 of Bonus Act 2030 requires that while computing bonus amount to be received by the employee, the amount separated for the distribution of bonus by the enterprise shall divided by the pay or wage amount of the employee so entitled to receive the bonus, and the figure so obtained shall be the percentage of bonus.
So, what type of employee can receive bonus?
Section 6 of Bonus Act 2030 states that employee working casually or in a shift basis are not entitled to obtain bonus. Section 8 of Bonus Act states employee shall not be entitled to obtain bonus he is punished or dismissed from service for committing (a) Theft/damage of the property of the enterprise (b) Illegal strike or abetment to other for such strike (c) Riots or breaching of discipline. However, an employee can obtain bonus for a period before committing such a punishable act.
So, how is period worked and period to be worked computed?
Maths:
Bonus Percentage = Amount separated for the distribution of bonus / Salary or wage amount of all employees entitled to receive the bonus
Step 3: Calculating the gross bonus amount
Section 7 of Bonus Act 2030 states that
| employee whose monthly salary or wage is | shall receive gross bonus of |
| ≤ 2×Minimum Remuneration | Annual Salary or Wage × MIN(Bonus Percentage, 8 / 12) |
| > 2×Minimum Remuneration | higher of: |
So, what is minimum remuneration?
The Government of Nepal, Ministry of Labor, Employment and Social Security has prescribed the minimum remuneration of the employees under Section 106 of the Labor Act 2074.
(1) Link to notice in Nepal Gazette
(2) Link to notice in Nepal Gazette
Maths:
Table above would suffice.
Step 4: Calculating the net bonus amount
Section 23 of Bonus Act 2030 states that the bonus to be obtained by an employee who has not worked the required days in any fiscal year, such an employee shall be entitled to the bonus by deducting proportionally from his gross bonus, for the days on which he has not worked.
Maths:
Net Bonus = Gross Bonus × days worked / days required to be worked
Step 5: Distribution of Bonus
Section 9 of Bonus Act 2030 states that the bonus shall be shall be paid in cash and shall be distributed within a period of 8 months from the end of the fiscal year. However, by submitting an application within the due time, to the Labor Office, the Labour Office may, if the reasons are found genuine, extend the time for a period of 3 months at maximum for distribution of bonus or may allow to distribute the bonuses of 2 years at a time in the next fiscal year.
Step 6: Depositing remaining amount in Welfare Fund and Social Security Fund
Section 13 of Bonus Act 2030 states that 70% of the residual amount after distribution of bonus from the allocated amount for bonus pursuant to Section 5 shall be deposited with the Welfare Fund established in accordance with Rule 84 of the Labour Rules 2075 and remaining 30% shall be deposited with the National Level Welfare Fund established in accordance with Rule 13 of the Bonus Rules 2039 by Government of Nepal for the interest of the employees of the enterprises.
Maths:
(a) Amount to be deposited in Local Level Welfare Fund = (Amount separated for the distribution of bonus – Net Bonus Amount distributed to employees) × 70%
(b) Amount to be deposited in National Level Welfare Fund = (Amount separated for the distribution of bonus – Net Bonus Amount distributed to employees) × 30%
Step 7: Submitting returns to Labor Office
Section 14 of Bonus Act 2030 states that each enterprise shall have to submit prescribed details to the Labour Office within 7 days from the date of completion
of bonus distribution. The details shall consist of:
• Name of the enterprise
• Dare of submission of financial statement to Labor Office
• Net income of the enterprise
• Amount set aside for bonus distribution
• Bonus percentage
• Amount distributed as bonus
• Amount deposited in welfare fund
• Name, Surname, Designation, Annual Salary, Period of Work, Amount distributed as bonus, Signature of the concerned employee and Remarks relating to each employee
Regarding tax deduction of Statutory Bonus Expenses do visit my other blog here: Tax Deduction of Statutory Bonus Expenses: Definitive Analysis