DEARNESS ALLOWANCE

ELEMENTS OF A COMPENSATION SYSTEM

TAXES
SALARY
INCENTIV
ES

BENEFITS

ALLOWA
NCES
LONG TERM
BENEFITS
Allowances
"Allowance" is defined as a fixed quantity of money or
other substance given regularly in addition to salary
for meeting specific requirements of the employees.
Most allowances are taxable like city compensatory
allowance, tiffin allowance, fixed medical allowance
and servant allowances. Encashment of any concession
is also taxable.
 HOUSE RENT ALLOWANCE:- Out of house rent allowance received during the
year, least of the following three amounts will not be included in income.
 The amount equal to 50% of annual salary, for persons staying in Mumbai, Chennai,
Calcutta or Delhi, but 40%, for others
 The actual amount of house rent allowance received
 The amount of rent actually paid in excess of 10% of annual salary ( Here, salary includes
basic salary, DEARNESS ALLOWANCE, and commission on fixed percentage,
but not other allowances).

 TRANSPORT ALLOWANCE :- Transport allowance for travelling from residence

to office is exempt up to Rs 800 per month
 Any allowance granted for encouraging the academic, research and other
professional pursuits is exempt, to the extent the allowance is utilised for the
purpose specified.
 CHILDREN EDUCATION ALLOWANCE:- Rs. 100 per month per child up to a
maximum of two children.
 Any allowance granted to an employee to meet the hostel expenditure on his child:-
Rs. 300 per month per child up to a maximum of two children
What Is Dearness Allowance (D.A.)?

 The dearness allowance is a part of the total compensation a

person receives for having performed his or her job.
 For example, workers in India might have a base salary or
pension, along with an allowance for housing and the dearness
allowance.
Dearness Allowance is a percentage of the original salary. The
percentage is reviewed and may be changed on a six-month
cycle.
Dearness Allowance is provided to help against rise in prices
for those on pension. This allowance may also be provided to
family members receiving benefits from a worker’s pension.
History:
Originated in India after First World War
“Dear Food Allowance”
Increase in Cost of Living Index in 1933-34
Increase in DA at rate of 1.75 pies per day (1939)
Origin of RMMS in 1946
“Old Textile Allowance” (1947)
“Revised Textile allowance”(1953)
ORIGIN OF D.A.
 Prior to 1972, there was no element of D.A. on pensions. From 01.04.1972 there
was a flat rate of D.A. to all the pensioners:
 01.04.1972 - Rs.5
 01.04.1973 - Rs.10
 01.10.1973 - Rs.15
 01.04.1974 - Rs.20
 01.02.1975 - Rs.28
 01.02.1976 - Rs.32
 01.04.1977 - 10%, subject to maximum of Rs.15
 15.09.1977 - Rs.10 for those retired prior to 01.06.1961, Rs.5 after 01.06.1961
 01.04.1978 - 5% increase, minimum Rs.10, maximum Rs.25
 From 01.04.1979 to 30.09.1984 there were 28 installments of D.A. paid to the
pensioners at certain fixed rates for 13 slabs of pension amounts. From 01.10.1984
to date, the pensioners are paid D.A. at certain percentage of basic pension.
ORGANIZED SECTOR V/S UNORGANIZED
SECTOR
India, workers in informal sector are distinguished from the
workers in formal sectors in the following way:
a) in the organized sector activities are regulated by legislation,
while that in unorganized sector are not well regulated.
b) workers in the organized sector are covered under social
security legislations, while they do not cover the unorganized
sector. As a rule of thumb the demarcation line between
organized and unorganized enterprises is at 10 employees.

 Workers engaged in the unorganized sector do not have the

benefit of several laws such as the Minimum Wages Act or the
Factories Act. They are also not covered by statutory welfare
measures such as maternity benefits, provident fund, gratuity,
etc.
  Apart from the organised sector, DEARNESS ALLOWANCE is also paid to
workers in the unorganised sector as a part of minimum wages.
 Their DEARNESS ALLOWANCE is revised every six months depending upon
the movement of index numbers. This is how erosion in the purchasing power of
workers in the unorganised sector is prevented.
 Increase in prices, there is an erosion in the wage levels in real terms, and in order to
prevent such an erosion, dearness allowance is paid and it is linked to the consumer
price index.
 There are various methods of linking the CONSUMER PRICE INDEX with the
DEARNESS ALLOWANCE and determining the extent of neutralisation of price
rise through payment of D. A.
 Some enterprises pay a fixed dearness allowance and also a variable dearness
allowance linked to the consumer price index.
 Some pay dearness allowance only linked to the consumer price index.
 INITIATIVES for Informal sector…

 Two major and recent initiatives for providing social security to the
workers in the informal sector have been passed in the parliament;

 a) the National Rural Employment Guarantee (NREG) Act 2005.

 b) the Social Security for Unorganized (Informal) Sector Workers.

 The National Rural Employment Guarantee (NREG) Act 2005 is meant

for the working poor in villages to take care of the problem of
underemployment and thus to enhance their income that would make
them less poor or cross the officially determined poverty line.
Sector wise D.A.
PRIVATE SECTOR
In private sector there is no such law of DA, so u can bifurcate minimum
wages in BASIC and HRA.
Dearness allowance is given to protect pay packet of an employee which is
erosion by virtue of inflation. (10%-12.5%)

PUBLIC SECTOR
RATE OF DA
D.A as per Bombay chamber of commerce
 Most of the employees or worker gets DA (Dearness allowance).
 Rate of DA is based on CPI (Consumer Price Index) especially for workers.
 Bombay chamber of commerce releases the CPI rate, based on which DA
for worker is been decided.
 CPI rate is different for different location. In other word the rates are
decided on location wise.
 Purpose of linking dearness allowance to the price index is lost because
the consumption pattern of the population undergoes changes, many
varieties of items go out of the market and prices for them are not
available
 some items become obsolete, and since the index numbers have an
upward bias, the employers have to pay higher dearness allowance than is
necessary.
Microsoft Office
Word Document
How to calculate Dearness Allowance:
 The present method of calculation of DA is called laspeyere's fixed base
methodology.
(i) Dearness Allowance is paid on the Basic Pay as defined in FR 9(21)(a)
(i)+NPA, if any (Personal Pay, Special Pay, etc., not included).

(ii) Fractions of 50 paisa and above to be rounded off to the next higher
rupee and less than 50 paisa ignored.

(iii) For part of a month, rate of Dearness Allowance to be applied on the

rate of pay+NPA and then Dearness Allowance for the number of days
calculated.

(iv) In the case of daily-rated worker, monthly pay reckoned at 26 times his
basic daily wages. Hence for part of a month, calculation of Dearness
Allowance will be on Monthly pay + 26 x Number of days.
How to calculate percentage of increase ?
 DA = (Avg. of AICPIN for the past 12 months – 115.76) * 100 / 115.76 .

All India Consumer Price Index Number for Industrial Workers (CPI-
IW) on base 2001=100 for May 2010 increased by 2 points and stood at
172 (one hundred and seventy two).

If the index value remains 172 in June 2010, then

 % of increase value is 44.91, = June 10 % of Increase index value minus
Jan 10 % of Increase index value.

 = 44.91 (-) 35.7  = 9.21.

i.e Minimum 9% percentage increase will be there in DA.
so DA will be  35 +  9 = 44 % .
 METHODS OF DA CALCULATION
In India, Dearness allowance (D.A.) is part of a
person's salary. D.A. is calculated as a percent of
the basic salary. This amount is then added to the
basic salary along with house rent allowance to get
the total salary.

1. Flat Rate
2. Graduated Scale
3. Cost of Living and Consumer Price Index No.
Contd…
Flat Rate:
Fixed amount paid to all categories of workers
Advantage: It is a simple and gives greater relief to low.
paid workers

Graduated Method:
DA paid according to slabs
Advantages: a) Convenient
b) Equitable
Contd….
Cost of Living and Consumer Price Index Number:
a. Price Index Number is system of linking DA
with
the Cost of Living Index
b. DA is calculated on the no. of points by
which the consumer price index has
risen
above the base index.
Advantage: “Low-paid category of workers securing a
much larger quantum of relief than High-paid
workers.”
Calculation of Variable Dearness Allowance:

Average All India CPI for the Qr in question - AICPI number for the year
(that is, last quarter of the previous year)
--------------------------------------------------------------------------------------------
-
AICPI number for the year (last quarter of the previous year)

DA = (above result) X rate of neutralization  X Basic Pay.

 Example of U.P.
-------------------
U.P. Govt with their notification dated 24 th Feb 2006 fixed basic of all category of workers on
average price index 522 and these rates were as given below
unskilled - Rs.. 2600
semiskilled- Rs.. 2964
skilled-- Rs.. 3290
mind it was basic and no VDA that time now VDA will change every year in the month of Apr
and Apr.
Now in Apr 2008 rates of minimum wages were as given below

basic VDA total

unskilled 2600 562.83 3163
semi-skill 2964 641.63 3606 (in round figure)
skilled 3290 712 4202

now VDA has to increase w.e.f 01 Apr 2009.For that we have to find out the average of
all India price index from Jan 2008 to June 2008.

All India consumer price index

jan2008 662
feb2008 671
mar2008 676
apr2008 685
may2008 685
jun2008 681
 --------
TOTAL 4060
NOW WE HAVE TO DIVDE 4060 BY 6 TO GET AVERAGE WHICH COMES TO 676.67
SAY 677
NOW WE CAN CALCULATE VDA WEF 01 APR 2009

UNSKILLED------(677-522 )*2600
----------------- = 772.03
522
NOW MINIMUM WAGES for unskilled is 2600+772.03=3373

SEMISKILLED-----(677-522)*2964
------------------ =880.11
522
NOW MINIMUM WAGES FOR SEMI SKILLED IS 2964+880.11=3845

SKILLED----------(677-522)*3290
------------- =976.92
522
NOW WAGES FOR SKILLED IS 3290+976.92=4267
this is how we calculate VDA
Importance:

Protecting the value of Basic Salary Structure

Increase in cost of living

Difference between DA/ F-IDA/ VDA
 Suppose the price index for industrial workers as on 30.09.2010 is 1000.
 Now the increase or decrease in price index during the coming period shall be a few
points more or less than 1000 in the near future.
 The price index is not going to come down say below 600 points. This is very much
certain based on past experience.
 Thus at the time of making NEGOTIATIONS with the workers the
management may safely agree that workers will get a certain sum as FIXED
DEARNESS ALLOWANCE so as to neutralise cost of living up to 600 points.
 This will mean that workers will now get VARIABLE DA in addition to FIXED
DA, beyond 600 points at the agreed rate.
 Technically there is no difference between FIXED DA and VARIABLE DA.
Both are taken into consideration for the purpose of calculation of retirement or
terminal benefits viz leave encashment, gratuity etc.
MEASURING CONSUMER PRICE
INDEX
 Measuring the Cost of Living

• Inflation refers to a situation in which the

economy’s overall price level is rising.
• The inflation rate is the percentage change in the
price level from the previous period.
THE CONSUMER PRICE INDEX
The consumer price index (CPI) is a measure
of the overall cost of the goods and services
bought by a typical consumer.
The Bureau of Labor Statistics reports the CPI
each month.
It is used to monitor changes in the cost of
living over time.
When the CPI rises, the typical family has to
spend more dollars to maintain the same
standard of living.
How the Consumer Price Index Is
Calculated
 Fix the Basket: Determine what prices are
most important to the typical consumer.
1. The Bureau of Labor Statistics (BLS) identifies a
market basket of goods and services the typical
consumer buys.
2. The BLS conducts monthly consumer surveys to
set the weights for the prices of those goods and
services.
Find the Prices: Find the prices of each of the
goods and services in the basket for each point in
time.
How the Consumer Price Index Is Calculated

Compute the Basket’s Cost: Use the data on prices to calculate

the cost of the basket of goods and services at different times.
Choose a Base Year and Compute the Index:
Designate one year as the base year, making it the benchmark
against which other years are compared.
Compute the index by dividing the price of the basket in one year
by the price in the base year and multiplying by 100.
Compute the inflation rate: The inflation rate is the
percentage change in the price index from the preceding
period.
How the Consumer Price Index Is
Calculated
The Inflation Rate
The inflation rate is calculated as follows:

C P I in Y e a r 2 - C P I in Y e a r 1
In fla tio n R a te in Y e a r 2 = 100
C P I in Y e a r 1
Table 1 Calculating the Consumer Price Index and the Inflation Rate: An
Example
Table 1 Calculating the Consumer Price Index and the Inflation Rate: An
Example
FYI: What’s in the CPI’s Basket?

16%
Food and
beverages

17% 41%
Transportation Housing

Education and
6%
communication 6%
6% 4% 4%

Medical care
Other goods
Recreation Apparel and services
Problems in Measuring the Cost of Living
The CPI is an accurate measure of the selected goods
that make up the typical bundle, but it is not a perfect
measure of the cost of living.
Substitution bias
Introduction of new goods
Unmeasured quality changes
SUBSTITUTION BIAS
The basket does not change to reflect consumer reaction
to changes in relative prices.
 Consumers substitute toward goods that have become
relatively less expensive.
 The index overstates the increase in cost of living by not

considering consumer substitution.

INTRODUCTION OF NEW GOODS
The basket does not reflect the change in purchasing
power brought on by the introduction of new products.
 New products result in greater variety, which in turn makes
each dollar more valuable.
 Consumers need fewer dollars to maintain any given standard

of living
UNMEASURED QUALITY
CHANGES
If the quality of a good rises from one year to the next, the
value of a dollar rises, even if the price of the good stays
the same.
If the quality of a good falls from one year to the next, the
value of a dollar falls, even if the price of the good stays
the same.
The BLS tries to adjust the price for constant quality, but
such differences are hard to measure.
Problems in Measuring the Cost of Living
The substitution bias, introduction of new goods,
and unmeasured quality changes cause the CPI to
overstate the true cost of living.
The issue is important because many government
programs use the CPI to adjust for changes in the overall
level of prices.
The CPI overstates inflation by about 1 percentage point
per year
Rate of neutralization
Rate of neutralization for determining
Basic Pay Slabs Dearness Allowances payable quarterly. All
India Consumer Price Index Number.
1 Upto Rs.5000 100 per cent of Basic Pay

2
Between Rs.5001 and 80 per cent of basic pay or 100 per cent of
Rs.7000 Rs.5000, whichever is higher

3
Between Rs.7001 and 70 per cent of basic pay or 80 per cent of
Rs.9500 Rs.7000 whichever is higher

4
Between Rs.9501 and 60 per cent of basic pay or 70 per cent of
Rs.12500 Rs.9500 whichever is higher
50 per cent of basic pay or 60 per cent of
5 Above Rs.12500
Rs.12500 whichever is higher
What is Industrial Dearness Allowance.
Industry-wise and Stratum-wise number of units paying DA as a
separate component of wages/salaries.
It is observed that only 62.09 per cent of the units are paying
dearness allowance as a separate component of wages/salaries
in the Plantation Sector. 
At the industry level :-
 51.73 per cent units in Coffee Plantations,
62.46 per cent units in Rubber Plantations and
73.95 per cent units in Tea Plantations were paying dearness
allowance to their employees.

 http://labourbureau.nic.in/OWS%20Chap%203.htm
How Inflation affects the cost of living
Inflation occurs when the total demand for goods and services in
an economy exceeds the supply of the same.
For instance, after the World War I, the German government
lowered the value of their currency by printing massive amount
of notes. And to buy a loaf of bread one had to spent a huge
amount. The present downward trends in the world economies
have resulted in credit crunch and financial crisis. These
situations have invoked the curiosity of many about why does
inflation occurs?
When inflation affects an economy, to maintain the same level of
living standards you would have to pay more for same amount
of goods and services you had used prior to inflation.
 your income may not increase at the same rate as inflation.
CPI &WPI affects Coast of Living
 Upward change in an employee's compensation because of inflation. The adjustment
is typically based on a price index such as the Consumer Price Index, Wholesale Price
Index, and Gross National Product Index. COLA is sometimes built into labor
contracts.
 COST OF LIVING ALLOWANCE (COLA)

 The CPI can sometimes be affected by a large hike in price of one commodity.
For example, the huge jump in oil prices in the United States. This affects
transportation, heating, food, and cuts into retail sales because of the squeeze on
workers' budgets.

 The WPI index that measures and tracks the changes in price of goods in the stages
before the retail level. Wholesale price indexes (WPIs) report monthly to show the
average price changes of goods sold in bulk, and they are a group of the indicators that
follow growth in the economy.
Although some countries still use the WPIs as a measure of inflation, many countries,
including the United States, use the producer price index (PPI) instead.
UNION’S HOLD ON
DA & NEGOTIATIONS
Section 2(b) of the Additional Emoluments (Compulsory Deposit) Act, 1974 defines
additional dearness allowance to mean such dearness allowance as may be sanctioned
from time to time after the appointed day, i.e., July 6, 1974 over and above the amount
of dearness allowance payable in accordance with the rate in force immediately before
the date from which such sanction of additional dearness allowance is to take effect.
Section 6(2) (b) enjoins on the employer the duty to make deductions and to remit to
the nominated authority additional dearness allowance from the emoluments
disbursed after the appointed day.
Section 115A of the Bombay Industrial Relations Act, 1946 provides that if any
agreement is arrived at between the employer and employees who are parties to an
industrial dispute pending before the industrial court, the award in such proceeding
shall be made in terms of such agreement, except in certain circumstances stated
therein.
As a result of NEGOTIATIONS between the employers and employees a settlement
was entered into between the parties on June 28, 1974 enhancing the dearness
allowance with retrospective effect from January 1, 1974.
 The Indus- trial Court before which certain disputes were pending gave the award
conformity with the settlement sometime in August-September, 1974. Arrears of
dearness allowance were paid after the appointed day.
 The Union Cabinet (16th September, 2010) approved 10% hike in
Dearness allowance (D.A) for Central Government Employees and
pensioners considering the high inflation in the past six months.
 The D.A is 35% with effect from 01st January 2010. The D.A will be
45% of the basic pay.
 The benefit of this declaration is for around 50 lac employees and 38 lac
pensioners and they get a relief from the soaring prices due to high
inflation rate.
 This D.A increase will cost approximately Rs. 9303 crore per annum.

 Dearness Allowance increases twice in every year in January and July

according to the price index to compensate the inflation.
Continued…
This D.A declaration is important because as per sixth central pay
commission, when the D.A overcome 50 % some daily allowances
will increase 25% percent.
Those allowances are Children Education Allowance, Child Care
Allowance, Washing Allowance, Cycle Allowance, Cash Handling
Allowance, Conveyance Allowance, and Split Duty Allowance.
Some advances like Flood Advance, Festival Advance also will be
increased by 25% when D.A exceeds 50%.
Next D.A declaration may overcome this limit as per the present
trend.
 Correlation Between
Cost of Living Index & D.A
The payment of dearness allowance stems from the
need to protect the erosion in the real value of basic
salary on account of inflation.

Consequently, the DA admissible is positively

correlated to the level of inflation.
 Merger of Dearness allowance with basic pay/ pension
to State Government employees/ pensioners with effect from
1.1.2006
1. Merge Dearness Allowance equal to 50% of the existing basis pay /
pension with the basic pay / pension with effect from 1.1.2006.
2. Direct that in the case of existing pensioners, Dearness Allowances equal
to 50% of the present pension shall with effect from 1.1.2006, be merged
with pension and shown distinctly as Dearness Pension.
3. The pensioners retiring between 1.1.2006 and 31.10.2006 are not facing
any loss in fixation of pension as a special dispensation in their cases.
4. Dearness Allowance equal to 50% of the basic pay would be treated as
basic pay purposes of computation of pension in respect of basic pay
received by them prior to 1.1.2006.
5. Consequently, the element of Dearness Pension will exist only for those
pensioners who have retired from service up to 31.12.2005.
 Merger of 50% Dearness Allowance with basic pay above shall be
admissible to full time employees who are at present getting Dearness
Allowance and paid from contingencies at fixed monthly rates.
 The merger of 50% Dearness Allowance sanctioned in this order shall
not be admissible to part–time employees.
 The merger of 50% Dearness Allowance with basic pay will also apply to
the teaching and non-teaching staff working in aided educational
institutions, employees under local bodies.
 The Dearness Allowances equal to 50% of basic pay / pension converted
into Dearness Pay / Dearness pension respectively would be deducted
from the existing rate of Dearness Allowance.
 The expenditure shall be debited to the sub-detailed head of account 03
Dearness Pay under the respective detailed Head 03 Dearness Allowance.
 The expenditure in respect of Pensioners / Family Pensioners shall be
debited to the detailed head of account 27. Pensions - 07. Dearness
Pension.
 Government has Allotted payment of
Pension with Dearness Allowance
Decided to merge Dearness Allowance equal to 50% of the existing basis pay / pension
with the basic pay / pension with effect from 1.1.2006.
Dearness Allowance equal to 50% of the basic pay would be treated as basic pay purposes
of computation of pension in respect of basic pay received by them prior to 1.1.2006.
The Dearness Allowances equal to 50% of basic pay / pension converted into Dearness
Pay / Dearness pension respectively would be deducted from the existing rate of Dearness
Allowance.
As per the New PENSION Scheme, the total Dearness Allowance is to be taken into
account for working out the contributions to Tier-I.
 Subsequently, a part of the “Dearness Allowance” has been treated as Dearness Pay.
Therefore, this should also be reckoned for the purpose of contributions.
 Contribution towards Tier-I from arrears of DA is to be deducted.
Since the contribution is to be worked out at 10% of (Pay+ DP+DA), it needs to be
revised whenever there is any change in these elements