Dearness allowance hike calculation: How it changed in the run-up to the 8th pay commission

Dearness allowance (DA) is one of the most important components of a central government employee’s pay package. The government's six-monthly DA hike protects the employee's monthly salary from erosion in value due to inflation.

As central government employees are currently expecting another round of DA hike before Holi and have their eyes on the 8th Pay Commission set up, we take a look at the evolution of DA hike calculation in last 30 years during the 7th, 6th, and the 5th pay commissions.

The 7th central pay commission (CPC) recommended to continue with the DA calculation formula suggested by the 6th pay commission. The 7th CPC made this decision based on two factors:

• The formulation of DA as suggested by the 6th CPC had worked well for years
• There was no demand to change the DA calculation formula.

"The Dearness Allowance (DA) is paid to Central Government employees to adjust the cost of living and to protect their Basic Pay from erosion in the real value on account of inflation. Presently, DA is based on the All India Consumer Price Index (Industrial Workers)....The JCM-Staff Side has suggested that the existing formula for the calculation of DA may continue," the 7th CPC noted.

Under 7th CPC, the DA calculation formula is as follows:

Dearness Allowance percent = ((Average of AICPI (Base Year 2001=100) for the past 12 months -115.76)/115.76) *100

However, this was not always the case.

What happened in the 6th and 5th CPCs

The 6th CPC had recommended to continue to use the AICPI-IW data as adopted by the 5th CPC to estimate DA rate. However, it recommended certain modifications.

The base year of AICPI (IW) used by the 5th CPC for DA calculation was 1982. The 6th CPC recommended to use the AICPI (IW) data with base year 2001 till it gets revised. However, it said the base year should be revised as frequently as feasible.

Under the 5th pay commission, the rate of DA was calculated in terms of the percentage increase in 12 monthly average of AICPI (base 1982) over the average index of 306.33, which was the reference base for the existing scales of pay recommended by the 5th CPC.

The formula used for this calculation till April 1, 2004 was as follows:

(12 Monthly Average-306.33/306.33)*100 = percentage increase in prices (ignoring fractions) and inflation neutralization at 100% at all levels)

The 5th CPC had also recommended that DA should be converted into dearness pay when the CPI increased by 50% over the base index. Accordingly, the government merged 50% of DA with basic pay with effect from April 1, 2004. And the formula for calculation of DA for the period from July 1, 20207 was:

{(12 monthly average-306.33/306.33)*100}-50 = percentage increase in prices (ignoring fractions) and inflation neutralization at 100% at all levels)

However, the 6th CPC recommended not to merge the dearness allowance with basic pay at any stage. It also said that DA may be "sanctioned twice a year as on 1st January and 1st July payable with the salary of March and September respectively for administrative convenience with inflation neutralization being maintained at 100% at all levels."

What’s expected now?

If approved, this DA hike may also be the last increase in the dearness allowance of central government employees before the formal set up of the 8th pay commission.

As all eyes are now on expected dearness allowance hike and the formation of the 8th CPC, we take a look at the dearness allowance calculation formula approved by the previous pay commission.