Dearness Allowance: What is DA merger and why the issue is in focus now, explained

Dearness allowance (DA) and dearness relief (DR) are components of basic salary tied to cost of living. It impacts the monthly pay of central government employees, public sector staff, defence personnel, bank employees and retired pensioners aimed at mitigating rising inflation.

DA and DR are revised twice annually based on the All-India Consumer Price Index (AICPI) formula as prescribed under the 7th central pay commission. Annually, the announcements are mostly made in March and October, with rollouts scheduled in January and July.

DA hike: Who are the beneficiaries?

The Centre last hiked DA and DR by 2% in April, effectively taking the component to 60% of the basic pay for central government employees and pensioners. DA and DR are meant to mitigate higher inflation.

About 50 lakh central government employees and around 65 lakh retired central government pensioners, including defence personnel and retirees, will benefit from an increase in DA and Dearness Relief (DR) components. There are 18 levels of employees, and the individual hikes will depend on the level of the employee or pensioner as basic pay of these employees differs from level to level.

Notably, DA is only offered to public sector employees and is not available as part of compensation for private sector workers.

Today, we explain DA merger and why the issue is in focus now.

What is DA merger? Why is the issue in focus?

The 7th CPC, which revised DA calculation formula also stipulated that DA be merged with basic salary if it exceeds 50%, according to a Bank Bazaar report. As of the last update, the component is now 60% of basic pay and may rise further if another hike is announced in July.

Notably, the government has not officially announced a DA merger as of June 2026, despite multiple employee unions raising the issue. The issue has gained traction because basic salary determines other components of compensation such as provident fund contribution, pension, allowances, gratuity, and more. Thus, merging DA into the basic pay will lead to substantial and automatic increase in overall pay and consequently the other dependent allocations.

With demands raised by employee unions and representative groups, the Centre is expected to make an announcement on the same soon.

How is Dearness Allowance calculated?

DA hikes are calculated based on the AICPI's 12-month average, using the method prescribed by the 7th pay commission. The formula used is as follows, according to Clear Tax:

• For central government employees — DA percentage = [(Average of AICPI (Base Year 2001 = 100) for the last 12 months – 261.42) / 261.42] x 100
• For public sector employees — DA percentage = [(Average of AICPI (Base Year 2001 = 100) for the last three months – 126.33) / 126.33] x 100

Thus, the 2% DA hike announced in April was calculated using the AICPI's 12-month average formula as follows:

DA percentage = (145.54 × 2.88 − 261.33) / 261.33 × 100

= (419.155 − 261.33) / 261.33 × 100

= 157.825 / 261.33 × 100 = 60.39%

This has been rounded down to 60%, which means the component was hiked 2% from the previous 58% of the basic salary.

Is DA subject to income tax? Is it part of CTC?

DA for salaried employees is subject to income tax in its entirety. Income-Tax Rules mandate that the DA component is stated separately in a taxpayers I-T returns (ITR).

DA is part of an employee's cost-to-company (CTC) and is credited as part of the monthly salary for central government employees. As per the ministry, payment on account of DA involving fractions of 50 paise and above may be rounded off to the next higher rupee and the fractions of less than 50 paise may be ignored.

When is the 8th pay commission decision expected?

Reports feel that another DA hike announcement could come this year in July or September amid inflationary pressures and as employees and pensioners seek relief against steadily rising living expenses.

As per the usual timeline, the CPC is expected to submit its final recommendations around 18 months after its constitution which means that the earliest, we can expect an announcement is February or April 2027.

Further, based on past trends, once the pay commission's recommendations are made, the rollout takes another two to three years to complete. This means that hikes announced in 2027 may only be fully implemented by 2029 or 2030.