How Your Bonus Is Taxed — and Why It Can Lose 40% Near ₹12 Lakh

Variable pay is part of your CTC, but it isn't part of your monthly salary — and it isn't taxed like a separate small income either. A bonus sits on top of your fixed pay, so it's taxed at the highest rate your income reaches. Sometimes that rate is much higher than you'd expect.

The rules

• A bonus is salary, taxed in the year it's due or paid, whichever comes first (Sec 15 of the Income-tax Act, 2025).
• Your employer deducts TDS at your average rate on its estimate of your whole year's salary (Sec 392, old 192). When a bonus is declared, the estimate jumps — so the employer either deducts the extra tax in the payout month, or spreads it over the months left in the year.
• Performance bonuses and the variable part of pay aren't "wages" under the Labour Codes (Ministry of Labour FAQ), so no PF or gratuity is worked out on them.

What a ₹2L bonus actually nets

New Regime, Basic at half of the fixed CTC. "Extra tax" is the difference between tax on fixed pay plus bonus and tax on fixed pay alone:

At ₹10L, the bonus is tax-free: fixed pay plus bonus still leaves taxable income under ₹12 lakh, where the Sec 156 (old 87A) rebate wipes out the tax.

At ₹13L, the same bonus loses 40.2%. Fixed pay alone is under the ₹12 lakh line, so it's tax-free; the bonus pushes you over it, and once you're past the rebate's relief band, tax on the whole income kicks in. This is the most expensive place to receive a bonus.

At ₹20L and ₹40L, the bonus is simply taxed at your top slab: 20% and 30%, plus 4% cess.

When it's paid

Companies pay variable pay on their own schedule — once a year, half-yearly or quarterly — and the amount usually depends on your rating and the company's results, so the CTC figure is a target, not a promise. The yearly tax is the same whichever way it's split; only the timing changes. If your employer deducts the bonus's tax in the payout month, that payslip looks low while the others are untouched. If it spreads the tax, every remaining month's take-home dips a little instead.

This is different from statutory bonus under the Code on Wages — a minimum of 8⅓% of wages for employees up to a wage limit the government notifies — which is a legal entitlement, not performance pay.