Dearness Allowance (DA)

Dearness Allowance can be understood as a component of salary which is some fixed percentage of the basic salary, aimed at hedging the impact of

inflation. Since DA is directly related to the cost of living, the DA component is different for different employees based on their location. This means DA

is different for employees in the urban sector, semi-urban sector, or the rural sector.

Increase in Dearness Allowance, effective July 1 from

34% to 38%
The cabinet had approved of a 4% increase in Dearness Allowance (DA) and Dearness Relief (DR) for employees of the central government and

pensioners from 1 July 2022. The DA rate is 38%, up from 34%.

What is Dearness Allowance?

Dearness Allowance (DA) is the cost-of-living adjustment allowance that the government provides to both current and retired

members of the public sector. Both employees in India and Bangladesh are covered by the DA component of the compensation. It is

determined using the government employee basic salary percentage.

Calculation of Dearness Allowance

After the Second World War, the DA component was introduced by the government. After 2006, the formula for calculating dearness

allowance has changed and currently, DA is calculated as follows:

For Central Government employees:

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

For Central public sector employees:

Dearness Allowance % = ((Average of AICPI (Base Year - 2001=100) for the past 3 months -126.33)/126.33) *100

Where, AICPI stands for All-India Consumer Price Index.

For example, consider that your base income is Rs.33,000 and that, with the most recent 4% increase, your DA percentage is 38%,

meaning that your dearness allowance is Rs.12540.  

Types of Dearness Allowance

The Two separate categories to calculate Dearness Allowance are Industrial and Variable Dearness Allowance.
Industrial Dearness Allowance
IDA, or industrial dearness allowance, is the benefit available to staff members of public sector businesses. The Indian government

recently enhanced IDA for this industry by 5%. All board-level executives, officers, and staff members of central PSUs stand to gain

from this judgment. To counteract the nation's rising inflation, IDA for government sector businesses is adjusted quarterly based on

changes in the Consumer Price Index (CPI).

Variable Dearness Allowance

VAD or Variable dearness allowance is the allowance that comes as a result of revision every six months for central government

employees. The changed new figure that is received as a result of taking into consideration the increase or decrease in the

Consumer Price Index, CPI, is termed as Variable dearness allowance. Based on this figure, the DA of employees is revised and

rolled out. Three components make up VAD. First is the consumer price index, second, the base index, and third is the variable DA

amount fixed by the government of India. The third component remains fixed until the government revises the minimum wages.

Same way, the base index also remains fixed for a particular period. Only the CPI or Consumer Price Index changes every month

and affects the overall value of the variable dearness allowance.

How is DA Treated Under Income Tax?

Individuals who are salaried employees must pay all applicable taxes on their Dearness Allowance. When all requirements are

satisfied and employees are given rent-free, unfurnished housing, the dearness allowance is considered part of the wage to the

extent that it is included in the retirement benefit salary. According to the Income Tax Act, tax liability for Dearness Allowance must

be disclosed in the submitted forms.

Role of Pay Commissions in DA Calculation

Every succeeding pay commission in India is required to reassess the public sector workers' salaries while taking into account all of

the salary's different components. The next pay commission report will take into account Dearness Allowance as well. Pay

commissions should account for all the elements that go into determining the compensation of public sector employees. The pay

commissions have the authority to review and modify the multiplication factor.

Dearness Allowance for Pensioners

The pension for retired public sector workers is adjusted each time a pay commission introduces a new compensation structure.

Similar circumstances apply to Dearness Allowance; whenever DA is increased by a specific percentage, retired public sector

employees' pensions also adjust in line with the change. This holds true for both standard pensions and family pensions.

Dearness Allowance Hike as per New Developments

Under the Budget
What came as a huge relief to most central government employees were the hike in the Dearness Allowance. The Union Cabinet

announced a raise of 2% in the DA of government employees recently. Spearheaded by Indian Prime Minister, Narendra Modi, this

move is going to benefit more than 50 lakh Central Government employees and approximately 55 lakh pensioners. To lessen

inflation effects on the salaries of these employees, the dearness allowance hike is usually offered to pensioners and staffers.

2018 witnessed a lot of changes in the realm of taxation. With the new budget, came a lot of new advancements and developments.

For more than 11 million employees, the Dearness Allowance was increased to 7% from an earlier rate of 5%.

According to the proposed changes, this hike is most likely to work in the favor of more than 48.41 lakh central employees and

61.17 lakh pensioners and staffers.

Difference Between DA and HRA

The overall salary of a government employee is determined by adding the basic income, other components like HRA (House Rent

Allowance), and the dearness allowance, which is computed as a specified proportion of the base wage. 

HRA or House Rent Allowance is the salary component given by an employer to an employee to meet expenses related to the

renting of accommodation which the employee takes for residential purposes. HRA applies to both employees from the private

sector as well as the public sector whereas DA is majorly applicable to employees working in the public sector.

After receiving lakhs of employee requests, the Central government is planning on increasing the HRA.

Dearness Allowance Merger

Since the year 2006, the dearness allowance for employees from the public sector has been continuously growing. The figure

currently stands at 50% of the basic salary. This has happened over several years during which the DA percentage rose steadily to

hedge the rising inflation.

As a rule, it is practice to merge the DA with the basic salary once the DA percentage breaches the 50% mark. This is supposed to

be a great salary booster for employees since all other components of the salary are calculated as a percentage of the basic salary.

Demands for merging the DA with the basic salary have been with the government for quite some time. The union cabinet is

expected to take a decision on this matter soon. In the meantime, employees from the public sector are ecstatic with anticipation of

a merged DA which would mean a major hike in their salaries.

7th Pay Commission

A Pay Commission is set up by the Government of India and it recommends the changes in the salary structure of central government employees.

Millions of government employees are waited for the 7th Pay commission to be implemented as it will increase their allowances, salary, and other

benefits. The Current 7th Pay Commission was to be implemented in January 2016. However, it had to be delayed.
What is a Pay Commission?
The Pay Commission was established by the Indian government to make recommendations regarding the compensation of central

government employees. Since India gained its independence, seven pay commissions have been established to examine and

suggest changes to the pay structures of all civil and military employees of the Indian government. Manmohan Singh, the then-

Prime Minister, approved the 7th Pay Commission, and it will be put into effect by January 2016, according to P. Chidambaram, the

former finance minister. The Seventh Pay Commission was not implemented by the suggested date of implementation, nonetheless,

because of several challenges.

7th Pay Commission

In the month of July, 2016, AK Mathur headed the Seventh Pay Commission and submitted a report on it to Finance Minister Arun

Jaitley. The report suggested a 23.55% hike in pay and allowances of government employees. If the 7th pay commission is

implemented, government employees will benefit from a pay hike and other benefits. The Government of India is planning to

implement the 7th Pay Commission's recommendations by January 2017. Uttar Pradesh has already approved the 7th Pay

Commission and have announced that it will be implemented by January 2017.

Seventh Central Pay Commission of India

Employees and staffers of the Central Government in India receive their pay according to the 7th Pay Commission System. After the

Union Budget presented on 5 July 2019, central government employees are waiting for an update from the 7th Pay Commission that

is generally made every 6 months. This news is related to an increase in their Dearness Allowance (DA). In January 2019, the

government had raised the DA for government employees by 3%. Financial experts are now expecting an increase of 5% in the DA.

Key Highlights of 7th Pay Commission

 Recommended minimum pay for government employees: A newly hired government employee at entry level would

now make a minimum salary of Rs.18,000 per month as opposed to Rs.7,000. The minimum pay for a newly hired Class I

Officer has been raised to Rs.56,100 per month. 

 Recommended maximum pay for government employees: The Seventh Pay Commission also recommends to

increase the maximum pay for government employees to Rs.2.25 lakhs per month for Apex Scale and Rs.2.5 lakhs per

month for Cabinet Secretary and others working at the same level.

 Pay Matrix: Considering the issues that exist in the Grade Pay Structure, the 7th Pay Commission has recommended a

new pay matrix. Once the 7th Pay Commission is implemented, the status of a government employee will not be decided

by Grade Pay but by the level in the new Pay Matrix.

 New Pay Structure: Ever since Central Government employees heard about the Pay Matrix system, they have questions

about their grades and levels. The New Pay Structure recommended by the 7th Pay Commission have included all

existing levels and have not introduced any new levels.

  Work Related Illness and Injury Leave (WRIIL): The Pay Commission recommends full pay and allowances to be

granted to all employees who are hospitalised due to WRIIL.

 Fitment: The 7th Pay Commission recommends a uniform Fitment Factor to eliminate partiality and discrimination in the

system. The Pay Commission has recommended a uniform Fitment Factor of 2.57 for all employees.

 The fitment factor pertaining to the 7th Central Pay Commission is likely to be set at 3.00 times from an earlier 2.57 times.

However, in contrast with the recommendations made by the 7th CPC, the employees are currently demanding a hike of

3.68 which essentially increases the fitment factor by three times.

 Dearness Allowance (DA): In what came as a huge relief to government employees, the Dearness Allowance witnessed

a hike of 2% recently. This move/act by the Union Cabinet is said to benefit more than 50 lakh Central Government

employees and around 55 lakh pensioners and staffers. This hike was mostly focused on Central Government employees

as they are most likely to bear the brunt of factors such as inflation. The raise went straight off to 7% from an earlier 5%.

 Annual increment: The Pay Commission has suggested to retain the annual increment of 3% p.a.

 Modified Assured Career Progression (MACP): The 7th Pay Commission aims at improving the quality of services

offered by the Government of India and thereby focuses on individual performance. According to the report, performance

benchmarks of MACP has been altered and made stricter. They have made the performance indicator stricter by adding

“Very good” performance level which was “Good” before. The report goes on to recommend that no annual increments

should be given to employees who do not meet their performance level and no promotions will be given if MACP is low for

the first 20 years in service.

 Military Service pay (MSP): The Seventh Pay Commission recommends MSP to be paid for Defence Personnel only.

MSP is the compensation paid to people offering military service in India. MSP will be payable for all ranks inclusive of

Brigadiers and people at the same level.

 Allowances: The Cabinet has examined a total of 196 allowances which are currently present and have abolished 51

allowances, retaining 37 allowances.

 House Rent Allowance (HRA): As the 7th Pay Commission aims at increasing the basic pay of government employees,

the Pay Commission has recommended that the House Rent Allowance also increase by 24%. The Commission also

states that HRA will increase to 27%, 18%, and 9% when DA (dearness allowance) crosses 50%. HRS will further

increase and will be paid at 30%, 20%, and 10% when DA crosses 100%.

 Advances: Apart from Personal Computer Advance and House Building Advance, 7th Pay Commission has abolished all

non-interest bearing advances. It is also noteworthy that House Building Advance has been increased from Rs.7.5 lakhs

to Rs.25 lakhs.

 Central Government Employees Group Insurance Scheme (CGEGIS): The Pay Commission has made some changes

to Central Government Employees Group Insurance Scheme. The recommended rates are as follows:

Level of Present monthly Present Recommended Recommended

employee deduction in insurance monthly deduction in insurance amount in

Rupees amount in Rupees Rupees

 Rupees

10 and
Rs.120 Rs.1,20,000 Rs.5000 Rs.50,00,000
above

6 to 9 Rs.60 Rs.60,000 Rs.2500 Rs.25,00,000

1 to 5 Rs.30 Rs.30,000 Rs.1500 Rs.15,00,000

Medical changes: The 7th Pay Commission has recommended a Health Insurance Scheme for Central Government employees

and pensioners. The report also recommends cashless medical benefit for pensioners outside CGHS area.

Pension: The Commission recommends changing the current pension system. They propose a new pension formula for civil

employees, such as CAPF and military personnel who retired prior to January 1, 2016. The new formula will put an emphasis on

achieving balance between current retirees and pensioners. The past pensioners will be placed on the new Pay Matrix system to

determine the new pension. The total number of increments a pensioner earned at that level while in active service will later be

added, at a rate of 3% annually, to determine the pension amount. The new pension will be equal to 50% of the amount as

determined. A pensioner will receive 2.57 times their base pension in the future.

Gratuity: The Commission recommends the ceiling of gratuity to be increased from the current Rs.10 lakh to Rs.20 lakh. They

further recommend that the ceiling on gratuity may be raised by 25% when the DA rises by 50%.

Disability Pension for Armed Forces: Instead of the current percentile-based disability pension regime, The Commission has

recommended to implement a slab-based system for disability element.

International Compensation
Designing and developing a better compensation package for HR professionals for the international assignments
requires knowledge of taxation, employment laws, and foreign currency fluctuation by the HR professionals.
Moreover, the socio-economic conditions of the country have to be taken into consideration while developing a
compensation package. It is easy to develop the compensation package for the parent country national but difficult
to manage the host and third country nationals. When a firm develops international compensation policies, it tries
to fulfill some broad objectives:

1. The compensation policy should be in line with the structure, business needs and overall
strategy of the organization.
2. The policy should aim at attracting and retaining the best talent.
3. It should enhance employee satisfaction.
4. It should be clear in terms of understanding of the employees and also convenient to
administer.
The employee also has a number of objectives that he wishes to achieve from the compensation policy of the firm

 He expects proper compensation against his competency and performance level.

 He expects substantial financial gain for his own comfort and for his family also.
 He expects his present and future needs to be taken care of including children’s education,
medical protection and housing facilities.
 The policy should be progressive in nature.
 Major Components in an International Compensation Package
 International Compensation is an internal rate of return (monetary or non monetary rewards / package)
including base salary, benefits, perquisites and long term & short term incentives that valued by
employee’s in accordance with their relative contributions to performance towards achieving the desired
goal of an organization

The following are the major components of an international compensation package.

1. Base Salary

This term has a slightly different meaning in an international context than in a domestic one. In the latter case, it
denotes the amount of cash compensation that serves as a benchmark for other compensation elements like
bonus, social benefits. For the expatriate, it denotes the main component of a package of allowances directly
related to the base salary and the basis for in-service benefits and pension contributions. Base salary actually
forms the foundation block of the international compensation.

2. Foreign Service Inducement Premium

This is a component of the total compensation package given to employees to encourage them to take up foreign
assignments. This is with the aim to compensate them for the possible hardships they may face while being
overseas. In this context, the definition of hardship, the eligibility criteria for premium and the amount and timing
of this payment are to be carefully considered. Such payments are normally made in the form of a percentage of
the salary and they vary depending upon the tenure and content of the assignment. In addition, sometimes other
differentials may be considered. For instance: if a host country’s work week is longer that of the home country, a
differential payment may be made in lieu of overtime.

3. Allowances

One of the most common kinds of allowance internationally is the Cost of Living Allowance (COLA). It typically
involves a payment to compensate for the differences in the cost of living between the two countries resulting in an
eventual difference in the expenditure made. A typical example is to compensate for the inflation differential. COLA
also includes payments for housing and other utilities, and also personal income tax. Other major allowances that
are often made are:

 Home leave allowance

 Education allowance
 Relocation allowance
 Spouse assistance (compensates for the loss of income due to spouse losing their job)

Thus, multinationals normally pay these allowances to encourage employees to take up international assignments
to make sure that they are comfortable in the host country in comparison to the parent country.

4. Benefits
The aspect of benefits is often very complicated to deal with. For instance, pension plans normally differ from
country to country due to difference in national practices. Thus all these and other benefits (medical coverage,
social security) are difficult to imitate across countries.

Thus, firms need to address a number of issues when considering what benefits to give and how to give them.
However, the crucial issue that remains to be dealt with is whether the expatriates should be covered under the
home country benefit programmes or the ones of the host country. As a matter of fact, most US officials are
covered by their home country benefit programmes. Other kinds of benefits that are offered are:

 Vacation and special leaves

 Rest and rehabilitation leaves
 Emergency provisions like death or illness in the family

These benefits, however, depend on the host country regulations.

5. Incentives
In recent years some MNC have been designing special incentives programmes for keeping expatriate motivated.
In the process a growing number of firms have dropped the ongoing premium for overseas assignment and
replaced it with on time lump-sum premium. The lump-sum payment has at least three advantages. First
expatriates realize that they are paid this only once and that too when they accept an overseas assignment. So the
payment tends to retain its motivational value. Second, costs to the company are less because there is only one
payment and no future financial commitment. This is so because incentive is separate payment, distinguishable for
a regular pay and it is more readily for saving or spending.

6. Taxes

The final component of the expatriate’s compensation relates to taxes. MNCs generally select one of the following
approaches to handle international taxation.

1. Tax equalization: Firm withhold an amount equal to the home country tax obligation of the
expatriate and pay all taxes in the host country.
2. Tax Protection: The employee pays up to the amount of taxes he or she would pay on
remuneration in the home country. In such a situation, the employee is entitled to any windfall
received if total taxes are less in the foreign country, then in the home country.

7. Long Term Benefits or Stock Benefits

The most common long term benefits offered to employees of MNCs are Employee Stock Option Schemes (ESOS).
Traditionally ESOS were used as means to reward top management or key people of the MNCs. Some of the
commonly used stock option schemes are:

 Employee Stock Option Plan (ESOP): A certain nos. of shares are reserved for purchase
and issuance to key employees. Such shares serve as incentive for employees to build long
term value for the company.
 Restricted Stock Unit (RSU): This is a plan established by a company, wherein units of
stocks are provided with restrictions on when they can be exercised. It is usually issued as
partial compensation for employees. The restrictions generally lifts in 3-5 years when the
stock vests.
 Employee Stock Purchase Plan (ESPP): This is a plan wherein the company sells shares to
its employees usually, at a discount. Importantly, the company deducts the purchase price of
these shares every month from the employee’s salary.
Problems
Culture

Culture is an abstract but collective concept, which is not defined as a certain object but covers more than one
object. It is a collection of Material wealth and Spiritual wealth including religious, customs, education, regulations,
laws, economy and even science. Culture also plays its part in the international compensation system.

People with different cultural backgrounds will view compensation system differently under the influence of culture.
So does the management of the system. Culture is a thing deeply rooted in the blood of people. People in the same
nation tends hold the same or similar mental programming way to process ideas and information. In other
countries, the way may differ. So is the case of compensation system, the certain culture will inclines to match one
culture of a nation if global mindsets are not brought in and lead people to manage systems in a certain way. A
simple and direct way to confirm it is to see the different meanings compensation in different countries.

Culture which forms a system of knowledge, information and beliefs will affect attitudes and behaviors associated
with the work. Culture affects the variables of the established compensation system. Though equity customs are
shared among the employees from many countries, America and Japan for example, the force of the customs really
works differently in different countries. In all, having the awareness of focusing the influence of culture values on
employees is extremely important for corporate leaders. When dealing with compensation system, the controlling
for context of culture should be paid attention.

Social Contract

Considered as part of the social contract, the employment relationship is not just an interaction between an
employee and an employer, and it also includes the government, all managers and all employees. The relationships
and expectations of these groups form the social contract. When thinking about how people get salaries around the
world, it is apparent that different people have different ideas, so they think variously of government, employers
and employees. The understanding of employee compensation management requires understanding of the social
contract in that country. How to change employee compensation systems–for example, to make them serve better
to customers, encourage innovative and quality service, or control costs–requires changing the expectations of
groups to the social contract.

Trade Unions

Europe keeps highly solidaric and Asia is less heavily unionized. In some countries, team agreement sets how
much the workers can earn even though the workers may not be union members. In France for example a majority
of workers are paid by collective agreements, but only a few are union members.

Managers Autonomy

Managerial autonomy reflects managers set his employees to make decisions by themselves. There is a relationship
between it and the degree of centralization. Government, trade unions and corporate police are responsible to
restrict managerial autonomy. Compensation decisions made in the domestic corporate offices and exported to
subsidies all over the world may relate to the corporate strategy but discount local economics and social conditions.

To sum up, international compensation is affected by economic, institutional, organizational, and individual
conditions, globalization really represents that these conditions are varying thus international pay system are
altering too.

4. Ownership and Capital Markets

Ownership and financing of companies are dramatically different around the world. These differences are vital to
the understanding and managing of international payment. These patterns of ownership make certain kinds of pay
systems have no significance. Employees in these corporations have various values and expectations. One research
indicated that people who work for local or public corporations like salaries according to one’s performance more;
however, those who work in federal owned corporations are on the opposite side. So it is obvious that ownership
differences have great effects on types of payment. It is very misleading to consider that every place is just like
home.

Objectives

The objectives of compensation package of MNCs are presented in Figure below MNCs manage the compensation
and benefits with the following objectives.

Consistency and Equity: MNCs design the salary and benefits package to secure consistency between pay and
performance and equity among employees of different nationalities and categories, and employees of subsidiaries
and parent company.

Recruitment and Retention of suitable Employees: MNCs design and practice compensation and benefits in
order to attract, and retain suitable employees in terms of job efficiency and cultural adaptability.

Facilitate Mobility: MNCs design pay package in order to enable the employees to move from the parent
company to foreign subsidiaries and from one foreign subsidiary to another foreign subsidiary.

Organisational performance: MNCs pay package should work as motivator to enhance employee job
performance, learning latest skills and contribute to the enhancement of organisational performance. In fact,
performance-based pay package enhances organisational performance.

Adaptability to Foreign Cultures and Environment: MNCs design pay package that motivates employees and
his/her family members to willingly adapt to the cultures and environment of the foreign countries. For example,
providing comfortable housing, highly reliable medical facilities, security facilities against odds and international
standards schooling facilities encourage employee’s family members to adapt to the foreign country cultures and
environment and allow the employee to concentrate on the job.

Importance of International Compensations

Optimizing Cost of Compensation: It is to facilitate the transfer of International employees in the most cost-
effective manner for the firm. Compensation management aims at optimizing the cost of compensation by
establishing some kind of linkage with performance and compensation. It is not necessary that a higher level of
wages and salaries will bring higher performance automatically but depends on the kind of linkage that is
established between performance and wages and salaries.

Attracting and Retaining Personnel: Most to attract and retain staff in the areas where the multinational has
the greatest needs and opportunities, hence must be competitive and recognize factors such as the incentive for
Foreign Services, tax equalization, and reimbursement for reasonable costs.

Consistency in Compensation: It means to be consistent with the overall strategy, structure and business needs
of the multinational. Compensation management tries to achieve consistency-both internal and external in
compensating employees. Internal consistency involves payment of the basis of criticality of jobs and employees’
performance on jobs. Thus, higher compensation is attached to higher-level jobs. Similarly, higher compensation
attached to higher performers in the same job. External consistency involves similar compensation for a job in all
organizations. Though there are many factors involved in the determination of wage and salary structure for a job
in an organization which may result into some kind of disparity in the compensation of a particular job as compared
to other organization, compensation management tries to reduce this disparity.