Quick answer: A bonus is a periodic reward, either statutory (8.33% to 20% for eligible employees under the Code on Wages) or discretionary. An incentive is paid for a specific measurable result, such as sales. Variable pay is the part of CTC that depends on targets. Ex-gratia is a voluntary goodwill payment with no legal obligation. All four are taxable as salary when paid to the employee. Under the Labour Codes, statutory bonus is excluded from wages, and the Labour Ministry's FAQs treat performance incentives and variable pay as outside wages too.
Offer letters and payslips use bonus, incentive, variable pay and ex-gratia almost interchangeably, but they are different things. The difference matters: one is a legal right, others depend on targets or the employer's goodwill, and they are treated differently for wages, PF and gratuity. This guide sets out what each term means, how they compare, the common types of bonus, and how each is taxed and treated in payroll. For statutory bonus rules and calculation, see our bonus calculation guide.
Bonus vs incentive vs variable pay vs ex-gratia at a glance
| Bonus | Incentive | Variable pay | Ex-gratia | |
|---|---|---|---|---|
| Purpose | Share of profit or reward for the year | Reward for a specific result | Pay linked to targets | Goodwill gesture |
| Legal basis | Statutory (Code on Wages) or contract | Incentive scheme or contract | Employment contract and policy | None; voluntary |
| Usual timing | Yearly or festival | Monthly or quarterly | Quarterly, half-yearly or yearly | One-off |
| Amount | Statutory 8.33%–20%, or as decided | Formula, e.g. % of sales | % of CTC, scaled by rating | Fixed by employer |
| In CTC? | Often | Sometimes, as a target | Yes | No |
| Income tax | Taxable | Taxable | Taxable | Taxable |
Bonus
A bonus is an extra payment over regular salary. In India it comes in two forms:
- Statutory bonus: under the Code on Wages, 2019, establishments with 20 or more employees must pay a bonus of at least 8.33% and up to 20% of wages to employees earning up to ₹21,000 a month, calculated on ₹7,000 a month or the minimum wage, whichever is higher. It must be paid within eight months of the end of the accounting year. Our bonus calculator works it out.
- Discretionary or contractual bonus: performance bonus, annual bonus, festival bonus and others that the employer pays by policy or contract, to any employee.
Statutory bonus is a legal right for eligible employees, payable even without allocable surplus (minimum 8.33% or ₹100, if they worked at least 30 days in the year), except that new establishments pay only in profit years during their first five years. Discretionary bonuses become a right only to the extent the contract or a consistent practice makes them one.
Incentive
An incentive is a payment for achieving a specific, measurable result: a sales incentive as a percentage of sales, a production incentive per unit above a target, or a collection incentive. Incentives are usually paid monthly or quarterly, under a written incentive scheme that sets the targets, rates and payout dates. Commission works like an incentive, but the Code excludes it from wages explicitly, while incentives rely on FAQ guidance.
Because incentives depend on individual output, they vary from month to month. A useful payslip shows them separately from fixed pay, so that employees can see their "net monthly salary without incentive" and payroll can apply the right treatment.
Variable pay
Variable pay is the part of CTC that is not guaranteed. An offer might show a CTC of ₹12 lakh, with ₹10.8 lakh fixed and ₹1.2 lakh variable, paid at the end of the year based on company results and the employee's rating. If targets are partly met, the payout may be 60% or 80% of the variable amount; if exceeded, it can be more.
Variable pay overlaps with performance bonus, and many companies use the terms for the same thing. The key point for employees is that the variable part of CTC is a target, not a promise. See our guide to CTC meaning for how it is shown in an offer.
Ex-gratia
Ex-gratia means "as a favour". It is a payment the employer makes voluntarily, without any legal or contractual obligation. Common examples are:
- A festival payment to employees who earn above the statutory bonus limit and are not entitled to statutory bonus.
- A payment above the statutory maximum, or by an establishment not covered by the bonus chapter.
- A one-time payment to an employee or family on a special occasion or hardship.
Calling a payment ex-gratia does not change its tax: paid to an employee, it is still taxable as salary. Ex-gratia paid to the family of a deceased employee can be treated differently; check before deducting TDS. A payment described as ex-gratia but paid every year on the same basis may in practice be treated as a bonus.
Bonus vs allowance
An allowance is a fixed, regular part of pay for a purpose, such as HRA or conveyance, and some allowances are excluded from wages. A bonus is a periodic or conditional reward, paid once or a few times a year. An amount paid every month regardless of results is an allowance in substance, whatever it is called.
Types of bonus at work
| Type | What it is | Example |
|---|---|---|
| Statutory bonus | Required by the Code on Wages for eligible employees | 8.33% of ₹7,000 or minimum wage for the year |
| Performance bonus | Based on individual or team rating | 10% of annual fixed pay for a top rating |
| Annual or year-end bonus | Based on company results | One month's basic for all staff |
| Festival bonus | Paid at Diwali, Onam, Eid or another festival | ₹5,000 before Diwali |
| Joining (sign-on) bonus | Paid to attract a new hire | ₹50,000 on joining, repayable if leaving within a year |
| Retention bonus | Paid for staying until a date | ₹1 lakh after a merger, paid at 12 months |
| Referral bonus | For referring a hire who joins | ₹20,000 after the new hire completes probation |
| Project bonus | For completing a project or milestone | ₹30,000 on go-live |
Wages, PF and gratuity
Under the Code on Wages, 2019, wages exclude any bonus payable under any law that does not form part of the remuneration under the terms of employment, and commission. The Labour Ministry's FAQs of March 2026, which are guidance rather than law, also treat performance incentives, variable pay and ESOPs as outside wages. So in most cases:
- Statutory bonus, incentives, commission and variable pay are not wages, and do not attract PF or count for gratuity.
- Statutory bonus is counted on the excluded side for the 50% rule, so a large bonus can push other excluded items over the limit.
- Contractual bonuses (festival, joining, retention) are not named exclusions, and incentives or variable pay rely on FAQ guidance, so treat them case by case and check whether they count towards the 50% limit.
- A fixed amount paid every month under a bonus or incentive label, regardless of performance, is likely to be treated as wages.
ESI uses the same wage definition under the Code on Social Security. Our guide to salary structure under the Labour Codes explains the 50% rule.
Tax on bonus, incentive and ex-gratia
All four are salary income under the Income-tax Act, 2025, taxed in the year they are received. The employer deducts TDS when paying them, usually by spreading the extra tax over the remaining months of the year or deducting it in the month of payment. A large year-end bonus can therefore cut take-home pay in that month. Our TDS on salary calculator estimates the effect.
For the employer, a bonus is deductible as an expense only when it is actually paid, or paid by the due date for filing the return for that year.
How to word them in offers and policies
- Say whether it is guaranteed: "variable pay of up to ₹1,20,000, payable on achievement of targets" is clearer than "bonus ₹1,20,000".
- State the basis and timing: the formula, rating scale and payout month.
- Set conditions: whether the employee must be on the rolls on the payout date, and whether joining or retention bonuses are repayable on early exit. A clawback is enforceable only if the signed terms state it clearly, and recovery is limited to reasonable compensation (section 74, Indian Contract Act). Pro-rata recovery is safer. Do not deduct it from final wages unless the deduction is permitted under the Code on Wages. There is no legal minimum joining bonus; it is purely contractual.
- Keep statutory bonus separate from performance pay, so eligibility and the 8.33% minimum are not lost.
Check the statutory bonus first. Use the free bonus calculator to work out the 8.33%–20% statutory bonus before planning performance bonuses and incentives.
Frequently asked questions
What is the difference between bonus and incentive?
A bonus is usually a periodic payment, often yearly, linked to company or individual performance, or required by law in the case of statutory bonus. An incentive is linked to a specific, measurable result, such as sales, production or collections, and is often paid monthly or quarterly. Both are taxable as salary.
What are the types of bonuses?
Common types are statutory bonus under the Code on Wages, performance bonus, annual or year-end bonus, festival bonus, joining or sign-on bonus, retention bonus, referral bonus, project completion bonus and ex-gratia payments.
What are the two types of bonuses?
Broadly, bonuses are either statutory, which the law requires the employer to pay to eligible employees, or discretionary, which the employer pays by choice or under the employment contract, such as performance, joining, retention or festival bonuses.
Is ex-gratia the same as bonus?
No. Ex-gratia is a voluntary payment made as a goodwill gesture, without any legal or contractual obligation, for example to employees not eligible for statutory bonus or on a special occasion. A statutory bonus is a legal right, and a contractual bonus is owed under the employment terms.
Is variable pay part of CTC?
Yes. Variable pay is usually shown in CTC as an amount payable on meeting targets, so the actual payout may be lower or higher than the amount shown. Fixed pay is the guaranteed part; variable pay depends on performance.
Are bonus and incentives taxable?
Yes. Bonus, incentives, variable pay and ex-gratia paid by an employer to an employee are all taxed as salary, usually in the year they are paid, and TDS applies when they are paid. Ex-gratia paid to the family of a deceased employee can be treated differently.
Position as of 15 November 2026, under the Code on Wages, 2019, the Labour Ministry's FAQs of March 2026 (guidance, not law) and the Income-tax Act, 2025. Statutory bonus thresholds are those notified by the Central Government; check your state's notifications where it is the appropriate government. General information, not legal or tax advice.