Tax on bonus in India: How TDS is calculated and deducted (FY 2025-26 & Tax Year 2026-27)

Rewarding employees with bonuses is a great way to recognize their contributions and celebrate the company's success. However, when it comes to income tax, bonuses are treated as part of an employee's income and are subject to tax in India.

This article breaks down how bonuses are taxed, how TDS on bonus is calculated, and what employers and employees need to know to plan ahead with clarity for FY 2025-26 (AY 2026-27) and Tax Year 2026-27 (under the Income-tax Act, 2025).

Introduction to employee bonuses

An employee bonus is an additional monetary reward given to employees beyond their regular salary. These are awarded based on performance and can be given during festivals, at year-end, or in recognition of exceptional contributions. By providing bonuses, employers can motivate employees to excel in their roles and contribute more effectively to the organisation's success.

Is a bonus taxable in India?

Yes, bonuses are taxable in India.

The bonus you pay to employees counts as income under the "Salary" head.

As per the "Receipt Basis" of taxation for salary under Section 15, a bonus is taxable in the year it is actually paid out, even if it relates to a previous year's performance.

For example, if you pay a bonus of ₹25,000 on 15 December 2025, it is considered part of the financial year 2025-26 (AY 2026-27), and tax must be paid for that year.

As an employer, you are responsible for calculating the tax on bonus payments and deducting TDS (Tax Deducted at Source) accordingly. The bonus amount is typically included with the regular salary details in Form 16, which you provide to employees.

Note on terminology: From 1 April 2026 onwards, under the Income-tax Act, 2025, the concept of "Assessment Year" is replaced by a unified "Tax Year", and Form 16 is renumbered to Form 130. Income earned up to 31 March 2026 (FY 2025-26 / AY 2026-27) continues to be governed by the Income-tax Act, 1961. Income earned from 1 April 2026 onwards is referred to as Tax Year 2026-27 under the new Act. The taxability of bonus income, however, remains unchanged.

How is tax on bonus calculated?

Tax on bonus payments is calculated using the income tax slab rates set by the government. The bonus amount is added to the employee's total annual income and taxed according to their applicable tax rate. Here's how you can calculate the tax on a bonus:

1. Add bonus to total income: Start by adding the bonus amount to the employee's total income for the financial year.

2. Apply tax slab rates: Use the income tax slab rates based on the employee's total income, including the bonus, under the chosen tax regime (old or new).

3. Calculate tax liability: Determine the tax liability on the employee's total income, now inclusive of the bonus, using the relevant tax rate.

4. Subtract deductions and rebates: Deduct any eligible exemptions, deductions, and Section 87A rebate (if applicable) to calculate the final tax amount.

5. Add cess: Add 4% Health & Education Cess on the total tax payable.

Income tax slabs for FY 2025-26 (AY 2026-27) and Tax Year 2026-27

The new tax regime is the default tax regime for individuals, HUFs, AOPs, BOIs, and AJPs. Employees who wish to opt for the old regime must declare so at the start of the year. Budget 2026 retained these slabs unchanged for Tax Year 2026-27 as well.

New tax regime - applicable for FY 2025-26 and Tax Year 2026-27:

Resident individuals are eligible for a Section 87A rebate of up to ₹60,000 if total income is up to ₹12 lakh. With the ₹75,000 standard deduction, salaried individuals earning up to ₹12.75 lakh effectively pay zero tax under the new regime.

Old tax regime - applicable for FY 2025-26 and Tax Year 2026-27:

Section 87A rebate under the old regime continues at ₹12,500 for income up to ₹5 lakh.

Step-by-step tax calculation on bonus

Assume an employee with an annual gross salary of ₹10,00,000 receives a ₹2,00,000 joining bonus in FY 2025-26. This bonus will be added to their total income, impacting the total tax liability. Here's how tax on bonus is calculated under both regimes:

New tax regime - Tax calculation:

Taxable income - ₹11,25,000

Up to ₹4,00,000: 0

₹4,00,001 – ₹8,00,000 @ 5% = ₹20,000

₹8,00,001 – ₹11,25,000 @ 10% = ₹32,500

• Total tax = ₹52,500

• Less: Section 87A rebate (income ≤ ₹12 lakh) = ₹52,500

• Tax payable before cess = Nil

Final TDS on bonus = ₹0

Under the old tax regime (FY 2025-26) 

Taxable income (before other deductions) = ₹11,50,000

Tax calculation:

Up to ₹2,50,000: Nil

₹2,50,001 – ₹5,00,000 @ 5% = ₹12,500

₹5,00,001 – ₹10,00,000 @ 20% = ₹1,00,000

₹10,00,001 – ₹11,50,000 @ 30% = ₹45,000

• Total tax = ₹1,57,500

• Add: Health & Education Cess @ 4% = ₹6,300

Final tax payable = ₹1,63,800 (before any 80C, 80D, HRA deductions)

This example shows why the choice of regime matters significantly when a bonus is involved. The new tax regime, combined with the enhanced 87A rebate, can result in a dramatically lower TDS on bonus for income up to ₹12.75 lakh.

How TDS on bonus is deducted

When a bonus is paid mid-year, employers typically follow one of two methods:

1. Distributed Deduction:

• Recompute the projected annual income including the bonus.

• Recalculate the total annual tax liability under the employee's chosen regime.

• Adjust the monthly TDS deduction for the remaining months to recover the additional tax due to the bonus.

• This ensures the employee's total TDS for the year aligns with the actual tax liability and avoids a large shortfall at year-end.

2. One-Time Deduction:

• The employer can also choose to deduct the entire tax applicable to the bonus amount as a one-time deduction from the bonus payout itself.

• This approach prevents the employee's regular monthly "Take-Home" salary from decreasing for the remainder of the year.

How can you help your employees save tax on bonuses?

While receiving a bonus is always a moment of celebration, it can also lead to an increase in taxes for your employees. The available tax-saving options depend on which regime the employee has opted for.

Deductions and exemptions under the Old tax regime 

If your employees have opted for the old tax regime, the following options can reduce the tax impact of a bonus:

• House Rent Allowance (HRA): Employees receiving HRA may claim tax exemption under Section 10(13A) by applying this allowance toward rent payments.

• Leave Travel Allowance (LTA): Employees can claim LTA for travel within India under Section 10(5) of the Income Tax Act.

• Home loan interest: Deduction of up to ₹2 lakh on home loan interest is available for self-occupied property, separate from Section 123 deductions.

• Life insurance premiums: Premiums paid can be deducted under Section 123, subject to the overall ₹1,50,000 limit.

• Public Provident Fund (PPF) and Equity-Linked Savings Scheme (ELSS): Investments in PPF accounts and ELSS funds are eligible for deduction under Section 80C, up to a maximum of ₹1,50,000.

• National Pension System (NPS): Employees can claim an additional ₹50,000 deduction under Section 124(3), over and above the Section 123 limit.

• Health insurance: Premiums paid under Section 126, up to ₹25,000 for self/family and an additional ₹50,000 for senior citizen parents.

• Donations: Charitable donations under Section 133 qualify for either 100% or 50% deduction depending on the recipient organization.

Deductions available under the New tax regime 

Most exemptions and deductions are not available under the new regime. However, employees can still claim:

• Standard deduction of ₹75,000 for salaried individuals and pensioners.

• Employer's NPS contribution: up to 14% of basic salary for both private and government employees in FY 2025-26 (raised from 10% in Budget 2024).

• Section 87A rebate of up to ₹60,000 for resident individuals with income up to ₹12 lakh.

Encourage your employees to evaluate both regimes at the start of the year, especially when a bonus is expected. Tools like Zoho Payroll's tax comparison feature can help employees make an informed choice and submit timely declarations.

Key takeaways

Understanding how tax on bonus is calculated in India is essential for employers managing employee compensation. Since bonuses are fully taxable as part of salary income, they can significantly increase an employee's overall tax liability. Nut the impact varies sharply between the old and new regimes. By guiding employees on the right choice of regime, eligible deductions, and the enhanced Section 87A rebate, you can help them maximize their earnings and reduce their tax burden.

Employers can simplify TDS on bonus calculation, regime comparison, and statutory compliance using Zoho Payroll.

Zoho Payroll is cloud-based AI-powered payroll software that automates salary calculations, tax deductions, employee self-service portal for choosing preferences, and Form 16 (Form 130 from Tax Year 2026-27) generation. With built-in compliance for India's labour laws, Zoho Payroll ensures accurate tax deduction every pay run.

Frequently asked questions

• Is a joining bonus taxable?

Yes, a joining bonus is taxable in India. It is considered part of the employee's salary under Section 15 of the Income Tax Act, 1961, and is taxed like any other component of the salary structure. Employers are required to deduct TDS on the joining bonus before disbursing it.

• Is a performance bonus taxable?

Yes, a performance bonus is fully taxable as it is part of the employee's salary income. Employers must include the performance bonus in the total salary while calculating tax liability and TDS.

• Is the tax on bonuses different from regular income tax?

No, bonuses are taxed just like regular salary income. The same income tax slabs and rates that apply to an employee's annual salary are used to calculate tax on bonus payments. There is no separate "bonus tax rate" in India.

• Can I claim deductions on bonus income?

The bonus is added to your total salary, so any deductions you are eligible for under the chosen tax regime apply to your overall taxable income, not specifically to the bonus. Under the new regime, only standard deduction, employer's NPS contribution, and the Section 87A rebate apply. Under the old regime, deductions under Sections 123, 124, HRA, LTA, etc., remain available.

• Will my bonus push me into a higher tax slab?

It can. Since bonus is added to your annual income, a large bonus may push part of your income into the next slab. However, only the portion of income that falls within the higher slab is taxed at the higher rate, not your entire income. If your total income (including bonus) crosses ₹50 lakh, surcharge will also apply.

• Does the new tax regime save more tax on bonus income?

For most salaried employees with income up to ₹12.75 lakh (after standard deduction), the new tax regime results in zero tax liability. For higher income earners, the choice depends on the deductions and exemptions they are eligible for under the old regime.

• Have tax slabs or bonus taxation rules changed for Tax Year 2026-27?

No. Budget 2026 made no changes to income tax slabs, the Section 87A rebate, or standard deduction. The slabs and rebate limits introduced in Budget 2025 continue to apply. The Income-tax Act, 2025 takes effect from 1 April 2026 and renumbers several sections (and renames Assessment Year to Tax Year, Form 16 to Form 130), but the substantive rules around taxation of bonuses remain unchanged.