Firstly, let’s understand the meaning of some terms used in Labor Act and Bonus Act
Basic Remuneration v. Remuneration
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.
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:
- Basic Remuneration
- Base Salary
- Annual Increment
- Overtime Pay
- Basic Remuneration
- 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.
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.
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.
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?
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|
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
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.
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.
(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