1. How is a bonus taxed?
A bonus is part of your salary income and is fully taxable. It's added to your total income for the year and taxed at your applicable slab rate. There are no special exemptions or deductions for bonuses.
The key point: your bonus is taxed at your marginal rate — the rate applicable to the highest slab your income falls into. If you're already in the 30% bracket, your entire bonus attracts 30% tax plus 4% cess.
2. The slab movement effect
A bonus can push you into a higher tax slab, which means part of your regular income also gets taxed at a higher rate. Here's an example (old regime):
| Scenario | Without bonus | With ₹1L bonus |
|---|---|---|
| Taxable income | ₹9,50,000 | ₹10,50,000 |
| Tax on first ₹5L | ₹12,500 | ₹12,500 |
| Tax on ₹5L–₹10L | ₹90,000 | ₹90,000 |
| Tax on above ₹10L | ₹0 | ₹15,000 |
| Total tax (before cess) | ₹1,02,500 | ₹1,17,500 |
| Cess (4%) | ₹4,100 | ₹4,700 |
| Total tax | ₹1,06,600 | ₹1,22,200 |
The bonus of ₹1,00,000 increased tax by ₹15,600 — an effective rate of 15.6%. But note that ₹50,000 of the bonus was taxed at 20% and ₹50,000 at 30%.
💡 The effective tax rate on your bonus is usually higher than your average tax rate, because it's taxed at the margin. Always compute the marginal impact, not the average.
3. TDS on bonus
Your employer deducts TDS on bonus in the month of payment. The TDS rate depends on your estimated annual tax liability. If your employer uses a flat rate (e.g., 30%), you may have excess TDS deducted, which you can claim back when filing your ITR.
Many employers spread the bonus over the year or adjust TDS in subsequent months to avoid a large one-time deduction.
4. How to reduce tax on bonus
- Max out deductions: Under the old regime, 80C, 80D, NPS, and home loan interest reduce taxable income and lower the marginal rate.
- Choose the right regime: If you have significant deductions, the old regime may reduce your overall tax including bonus.
- Stagger income: If you have control over when bonus is paid (e.g., deferred compensation), consider the tax year.
- NPS employer contribution: Under 80CCD(2), employer NPS contributions up to 10% of basic are deductible — even in the new regime.
- Plan charitable donations: 80G deductions can reduce taxable income in the year of the bonus.
5. Bonus vs salary: what's better?
From a tax perspective, there's no difference — both are taxed at slab rates. However, a bonus may affect your HRA exemption (if HRA is a percentage of salary) and PF contributions (if PF is on basic + DA). A structured salary with allowances may be more tax-efficient than a large bonus.
6. Common mistakes
- Not accounting for slab movement: Assuming the bonus is taxed at your average rate, not marginal.
- Not updating employer: If you have other income, declare it to avoid under-deduction.
- Ignoring cess: 4% cess applies on tax, including tax on bonus.
- Forgetting to claim refund: If TDS on bonus was higher than actual liability, claim it in your ITR.
- Not planning investments: A bonus year is a good time to max out 80C, 80D, and NPS.
7. Final thoughts
Bonuses are welcome but heavily taxed at the margin. The key is to plan ahead: maximise deductions in the bonus year, choose the right regime, and understand that the effective tax rate on your bonus is higher than your average rate.
Use this calculator to see the exact impact, then decide how to structure your finances to keep more of your bonus.