The History of the Dearness Allowance

Dearness Allowance is a compensatory part of wages. In India, DA is being paid since the Second World War. During the War, DA became payable at various rates. It became payable as a result of different costs of living in different cities not known to each other.

Originally, it was the textile industry in Bombay which introduced the DA scheme firstly under the bipartite settlement and subsequently they took the shape of arbitration, adjudication and finally, after knocking at the doors of industrial courts, got into awards, which is how in India DA scheme started.

In other parts of the world to DA was paid depending upon the rise in the cost of consumer goods prices. Within 5-10 years, the system of DA became a common system throughout the world but the basic principles remained the same.

In most parts of the world, though not everywhere, common platform DA became payable though not at the same rates.

Ultimately, the question of  DA became a subject matter of the Supreme Court. The court initially laid down general principles for the fixation of DA grant and the link with the cost of living index.

Slowly and gradually, Supreme Court gave effect to DA in terms of rising in the cost of living, higher prices and higher cost of living. This gave rise to the whole country for Consumer Price Index which is linked with rising in the index in different cities in the country.

Bombay was found to be the most expensive city in the country and sometimes even in the world. It moves from time to time and so does the atmosphere with it.  At different times, each sphere had a different price level which is recorded regularly on the price index. Each price index is differently numbered and differently marked in each state.

In our country, this price index is Bombay Price Index, Delhi Price Index, Kolkata Price Index, Ahmedabad Price Index etc., and prices of each number in each city are differently made and known. This is preliminary of DA.

The issue of DA has gone much ahead and now it is paid according to the standard of each city in the country. With the passing of time and cost of living going up, working-class life became more and more miserable as a result of which every wage-fixing authority had to view its point to the phenomenon and fortunately in our country the Government which is the biggest and model employer had to take cognizance of this fact and went on appointing pay commissions one after another after a lapse of five to  7 years and each pay commission gave thorough consideration to the problem of Dearness Allowance.

Each pay commission not only increased the dearness allowance of the Central Government employees and gave higher and higher benefits under the improved schemes. In the chapter on Dearness Allowance (DA), the fourth pay commission for the Central Government employees said that the “Dearness allowance which is being paid at present is like a compensatory payment to employees for erosion in the real value of their salaries resulting from the price rise.

The allowance has been in existence for about four decades and now covers almost all employees in the organised sector. Accordingly, it has emerged as an important area of pay administration having financial, economic and administrative implications.

Over the years, there have been many changes in the policy for payment of dearness allowance, particularly concerning coverage of employees, percentage of neutralisation for different categories, periodicity of payment, etc.

The III Central Pay Commission

The rates of dearness allowance provided a neutralisation of about 95 per cent on the lowest pay and the neutralisation percentage went on declining for higher pay levels so that m respect of the employees drawing pay between Rs.1600/- and 2250/- per month it worked out to about 30 per cent or less.

The Commission also recommended that on the price level rising above the 12-monthly average of 272 (1960=100), the government should review the position and decide whether the dearness allowance scheme should be extended further or the pay scales should be revised.

The government decided on three occasions to treat part of dearness allowance as dearness pay for certain purposes more particularly to provide relief in the matter of death-cum-retirement benefits to retiring employees.

The state governments also compensate their employees for price rise in the form of dearness allowance, which is granted by them more or less on the same pattern as followed by the central government, since the pay scales of state government employees are linked to different index levels, the actual rates of dearness allowance paid by them are different from those payable to central government employees.

The IV Central Pay Commission

The IV Central Pay Commission recommended the grant of DA on a 'percentage system' of the basic pay (1986). It also recommended payment of DA twice a year; 1 January and 1 July. Each instalment of DA was to be calculated concerning the percentage increase in the 12 monthly average of the All India Consumer Price Index (base 1960).  “We are also of the view that the compensation should provide full neutralisation of price rise to employees drawing basic pay up to Rs.3500/-, 75 per cent to those getting basic pay between Rs.3501/- and 6000/- and 65 per cent to those getting basic pay above Rs.6000/-subject to marginal adjustments. This compensation may continue to be shown as a distinct element of remuneration.

“We have recommended that compensation for price rise should be sanctioned twice a year. This would ensure that there would be no uncertainty in the minds of government employees concerning the periodicity of the grant of compensation. We realise that there may be situations when the government may not find it possible to sanction the compensation for price rise according to the scheme recommended by us. We are of the view that in such situations, the restraint if any, should apply to the entire organised sector including central government employees.”

The V Central Pay Commission

Fifth Pay Commission also said Dearness Allowance (DA) is a compensatory payment to the employees for the erosion in the real value of their salaries, resulting from the price increase. While the First and Second CPC’s suggested payment of DA at flat rates for employees in different pay scales for different levels of Consumer Price Index (CPI): the 3rd and 4th CPC’s while linking DA to both the CPI and pay- scales, recommended DA as a percentage of the basic pay. While DA was made payable automatically by the first CPC once a specific level of Consumer Price Index was attained, the 2nd CPC did not favour automatic sliding scale adjustments and recommended that the Government should review the position and consider the case for an increase in DA, each time the index increased by 10 points.

The merger of 50% DA with basic pay was ordered under the 5th pay commission recommendation,

The VI Central Pay Commission

The Sixth Central Pay Commission (CPC) has devoted the fourth chapter of the report to the subject of Dearness Allowance (DA) payable to government servants. The sanction of Dearness Allowance is at present based on a calculated six-monthly increase in the All India Consumer Price Index (Industrial Workers) (AICPI-IW) with base year 1982=100. The 6th commission did not recommend the merger of DA with basic at any stage.

7th CPC DA calculation formula

The formula for calculating Dearness Allowance for Central Government employees as per the 7th Pay Commission report/recommendation after 1.1.2006 is :

Dearness Allowance %= {(Average of AICPI(Base year 2001=100) for the past 12 months – 115.77)/115.77}*100

Recently, the Ministry of Labour and Employment released the new series of Consumer Price Index for Industrial Workers (CPI-IW) with the base year 2016. The new series of CPI-IW with base 2016 has replaced the existing series with base 2001. It gives more weightage to spending on health, education, recreation and other miscellaneous expenses while reducing the weight of food and beverages.

Find out more at the New DA calculation formula as per the AI CPI-IW series with base 2016 | Expected Dearness Allowance (DA) from January 2022 Calculator