18.1 Dearness Allowance (DA) is an allowance paid to employees to compensate them for erosion of real income / wage due to inflation, which they were getting on a particular bench-mark date. This bench-mark date is generally the date from which a pay structure / a set of pay scales is given effect to.

18.2 The increase in the cost of living and the consequent erosion of income is measured in terms of a consumer price index number and, DA to be sanctioned to employees is determined on the basis of the percentage increase in that index or the point-factor system.

18.3 The very concept of DA is a post-Second World War phenomenon. Initially, the frequency and quantum of DA given were more or less on an adhoc basis, by way of response to demand of employees for wage increases to mitigate their hardship. Later on, the payment of DA was linked to a Consumer Price Index number. Consequently, a formula came to be evolved, with reference to :

a) the basis for computation of increase in cost of living,

b) the frequency of DA revision and

c) the extent to which neutralisation of such increase would be given.

18.4 Periodical Committees / Commissions were constituted in the past by the Central Government to examine the question of payment of DA to the employees. The Committees’ / Commissions’ recommendations were generally accepted and implemented by the Government of India and the State Governments also followed it.

18.5 The III Central Pay Commission (CPC) recommended payment of DA whenever the CPI rose by 8 points over the index of 200 (with base 1960 = 100). This principle was changed in 1986 as per the recommendations of the IV CPC. The IV CPC recommended the grant of DA on a 'percentage system' of the basic pay.

18.6 Similarly, the extent of neutralisation of price increases given to various categories of employees has also undergone change from time to time. However, the general pattern adopted, all over the country is to give the benefit of 100% neutralisation to the lower categories of employees, with tapering scale of neutralisation to higher categories of officials. The extent of neutralisation granted with effect from 1-1-1973 (based on the Report of III CPC) ranged from 100 per cent to 35 per cent. But, upon the recommendation of the IV CPC, this method of neutralisation has been altered with effect from 1-1-1986.

18.7 As per the recommendation of the IV CPC, DA was admissible twice a year, that is, on 1st January and 1st July and each instalment of DA was calculated with reference to the percentage increase in the 12 monthly average of All India Consumer Price Index (AICPI) (base 1960) over the average index of 608, which was the base for the pay scales recommended by IV CPC. Thus the extent of neutralisation based on the recommendation of IV CPC ranged from 100 per cent to 65 per cent. This system of tapering scale of neutralisation was rested on the assumption that employees drawing higher salary would be able to absorb the impact of price rise to certain extent, but lower categories of employees need full protection in the interest of social justice, since they cannot withstand the effects of price-rise.

18.8 However, it may be noted that even 100 per cent neutralisation may only protect the real value of wages of employees as on a fixed, earlier bench-mark date, but it does not add to their real income. Similarly, the higher salaried officials would feel the pinch of erosion in their real income on the lower percentage of neutralisation. Besides, over a period of time, such tapering neutralisation of DA would seriously distort the relativity of pay scales that have been determined after taking into account factors like qualifications, training, nature of work, degree of responsibilities etc.

18.9 The anomaly in the differential neutralisation has been highlighted in the report of the Karnataka IV Pay Commission in 1992, of which, the Chairman of the present Commission was also its Chairman. There, the IV Karnataka Pay Commission observed :

"We are highlighting these issues to bring out the unfairness which is inherent in the present scheme of neutralisation of DA for price rise. We have refrained from making any specific recommendation in this regard mainly because the scheme has been evolved on All India basis and the State Government has adopted it. We only hope that the future Pay Commission appointed by Government of India will take note of the drawbacks in the scheme of neutralisation of DA for rising price and formulate a more objective scheme based on fairness."1

18.10 The V CPC has also realised the injustice in the graduated scale of neutralisation formulae. It has observed :

"Inflation neutralisation on a graduated scale in the present circumstances will be anachronistic and unduly unjust to senior officers.

It went a step further and said :

" . . . . . . . the Government’s conscious intervention in removal of the unjust practice of differential neutralisation of DA is a must. Accordingly, we recommend that inflation neutralisation be made uniform at 100 per cent at all levels."


1. Report of the Karnataka Fourth Pay Commission, Chapter XV, page 432-433.


18.11 The V CPC, among other things recommended that AICPI for Industrial workers to be continued as the basis for the purposes of calculating DA and the existing practice of using 12-monthly average of AICPI for calculating DA also to be continued.

18.12 The Government of India and also the State Governments in general have accepted and implemented the principles enunciated by the V CPC.

18.13 We consider that the same principle of neutralisation should be extended to Judicial Officers also.


18.14 We recommend that the same DA formula as being implemented at present to the Central Government employees be followed in the case of Judicial Officers, in every State / UT.


* * * * *