SummaryFor an efficient utilization of the upstream bandwidth in passive optical network, a dynamic bandwidth assignment mechanism is necessary as it helps the service providers in provisioning of bandwidth to users according to the service level agreements. The scheduling mechanism of existing schemes, immediate allocation with colorless grant and efficient bandwidth utilization (EBU), does not assign the surplus bandwidth to a specific traffic class and only divides it equally among the optical network units (ONUs). This results in overreporting of ONU bandwidth demand to the optical line terminal and causes wastage of bandwidth and increase in delays at high traffic loads. Moreover, the EBU also assigns the unused bandwidth of lightly loaded ONU queues to the overloaded queues through an Update operation. This Update operation has a flaw that it borrows the extra bandwidth to a queue in the current service interval, if the queue report is higher than its service level agreement and refunds in next service interval. This borrow‐refund operation causes reduced bandwidth allocation to the lower priority classes and increases their delay and frame loss. This study improves both these weaknesses. The simulation results show that the proposed scheme uses bandwidth efficiently and reduces mean upstream delay of type‐2 (T2) traffic class by 38% and type‐3 (T3) up to 150% compared to immediate allocation with colorless grant at a cost of up to 10% higher delay for T2. However, T4 performance improves by 400% compared to EBU with slight increase in delay for T2 traffic class. Overall, it shows a balanced performance for all the traffic classes and minimizes the bandwidth waste per cycle as well as the frame loss rate.