ELEMENTS OF A COMPENSATION SYSTEM
TAXES

SALARY

INCENTIVES

ALLOWANCES
BENEFITS LONG TERM BENEFITS

Allowances
y "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.

y HOUSE RENT ALLOWANCE:- Out of house rent allowance received during the

year, least of the following three amounts will not be included in income.
y The amount equal to 50% of annual salary, for persons staying in Mumbai, Chennai,

Calcutta or Delhi, but 40%, for others y The actual amount of house rent allowance received y 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).

y TRANSPORT ALLOWANCE :- Transport allowance for travelling from residence

to office is exempt up to Rs 800 per month y 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. y CHILDREN EDUCATION ALLOWANCE:- Rs. 100 per month per child up to a maximum of two children. y 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.)?
y The dearness allowance is a part of the total compensation a person receives for having performed his or her job. y For example, workers in India might have a base salary or pension, along with an allowance for housing and the dearness allowance. y Dearness Allowance is a percentage of the original salary. The percentage is reviewed and may be changed on a six-month cycle. y 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.

75 pies per day (1939) y Origin of RMMS in 1946 y ³Old Textile Allowance´ (1947) y ³Revised Textile allowance´(1953) .History: y Originated in India after First World War y Dear Food Allowance y Increase in Cost of Living Index in 1933-34 y Increase in DA at rate of 1.

1972 .28 01.Rs.04.A.09. on pensions.Rs.06.1977 .Rs.15 01.Rs.02.ORIGIN OF D.1984 there were 28 installments of D. y Prior to 1972. From 01.1961 01.1978 .04.10%.Rs.10. maximum Rs.1973 . there was no element of D.15 15. paid to the pensioners at certain fixed rates for 13 slabs of pension amounts.5% increase.1979 to 30.1977 .A. to all the pensioners: 01.A.A.Rs.10 for those retired prior to 01.04.5 after 01.10.1984 to date.1972 there was y y y y y y y y y y a flat rate of D. at certain percentage of basic pension.04.10.06.1976 . . the pensioners are paid D.04.10 01. minimum Rs.20 01.5 01. subject to maximum of Rs.04.1973 .02.1975 .1961.04.Rs.A.09. Rs. From 01.1974 .32 01.25 From 01.

y b) workers in the organized sector are covered under social security legislations. y Workers engaged in the unorganized sector do not have the benefit of several laws such as the Minimum Wages Act or the Factories Act. gratuity. while that in unorganized sector are not well regulated.ORGANIZED SECTOR V/S UNORGANIZED SECTOR India. They are also not covered by statutory welfare measures such as maternity benefits. . while they do not cover the unorganized sector. etc. workers in informal sector are distinguished from the workers in formal sectors in the following way: y a) in the organized sector activities are regulated by legislation. provident fund. As a rule of thumb the demarcation line between organized and unorganized enterprises is at 10 employees.

Some enterprises pay a fixed dearness allowance and also a variable dearness allowance linked to the consumer price index.y Apart from the organised sector. . y Their DEARNESS ALLOWANCE is revised every six months depending upon the movement of index numbers. Some pay dearness allowance only linked to the consumer price index. A. 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. DEARNESS ALLOWANCE is also paid to y y y y workers in the unorganised sector as a part of minimum wages. Increase in prices. and in order to prevent such an erosion. there is an erosion in the wage levels in real terms. dearness allowance is paid and it is linked to the consumer price index. This is how erosion in the purchasing power of workers in the unorganised sector is prevented.

y 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. . y b) the Social Security for Unorganized (Informal) Sector Workers. y a) the National Rural Employment Guarantee (NREG) Act 2005.INITIATIVES for Informal sector y Two major and recent initiatives for providing social security to the workers in the informal sector have been passed in the parliament.

Dearness allowance is given to protect pay packet of an employee which is erosion by virtue of inflation. (10%-12. y PRIVATE SECTOR In private sector there is no such law of DA. so u can bifurcate minimum wages in BASIC and HRA.Sector wise D.A.5%) y PUBLIC SECTOR .

RATE OF DA .

y Rate of DA is based on CPI (Consumer Price Index) especially for y y   workers. Purpose of linking dearness allowance to the price index is lost because the consumption pattern of the population undergoes changes. Bombay chamber of commerce releases the CPI rate. many varieties of items go out of the market and prices for them are not available some items become obsolete. the employers have to pay higher dearness allowance than is necessary. In other word the rates are decided on location wise. CPI rate is different for different location.D. and since the index numbers have an upward bias.A as per Bombay chamber of commerce y Most of the employees or worker gets DA (Dearness allowance). based on which DA for worker is been decided. .

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calculation of Dearness Allowance will be on Monthly pay + 26 x Number of days. not included). .How to calculate Dearness Allowance: y The present method of calculation of DA is called laspeyere's fixed base methodology. rate of Dearness Allowance to be applied on the rate of pay+NPA and then Dearness Allowance for the number of days calculated. etc. monthly pay reckoned at 26 times his basic daily wages. Hence for part of a month. (iv) In the case of daily-rated worker.. Special Pay. (i) Dearness Allowance is paid on the Basic Pay as defined in FR 9(21)(a)(i)+NPA. if any (Personal Pay. (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.

76 .21.91 (-) 35.7 = 9.How to calculate percentage of increase ? y DA = (Avg. . All India Consumer Price Index Number for Industrial Workers (CPIIW) on base 2001=100 for May 2010 increased by 2 points and stood at 172 (one hundred and seventy two). then y % of increase value is 44. = June 10 % of Increase index value minus Jan 10 % of Increase index value. = 44.91.76) * 100 / 115. of AICPIN for the past 12 months 115. If the index value remains 172 in June 2010. so DA will be 35 + 9 = 44 % . i.e Minimum 9% percentage increase will be there in DA.

) is part of a person's salary. D. Dearness allowance (D. This amount is then added to the basic salary along with house rent allowance to get the total salary. Graduated Scale 3. Cost of Living and Consumer Price Index No. . Flat Rate 2.A.METHODS OF DA CALCULATION In India.A. is calculated as a percent of the basic salary. 1.

Contd« y Flat Rate: Fixed amount paid to all categories of workers Advantage: It is a simple and gives greater relief to low. paid workers y Graduated Method: DA paid according to slabs Advantages: a) Convenient b) Equitable .

Price Index Number is system of linking DA the Cost of Living Index b. DA is calculated on the no. of points by which risen the consumer price index has above the base index. with y Cost of Living and Consumer Price Index Number: a.Contd«. y Advantage: Low-paid category of workers securing a much larger quantum of relief than High-paid workers. .

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.Calculation of Variable Dearness Allowance: Average All India CPI for the Qr in question . .

.P.e. 3290 mind it was basic and no VDA that time now VDA will change every year in the month of Apr and Apr.Rs.P. ------------------U. All India consumer price index jan2008 662 feb2008 671 mar2008 676 apr2008 685 may2008 685 jun2008 681 ..y Example of U.83 3163 semi-skill 2964 641. 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. Now in Apr 2008 rates of minimum wages were as given below basic VDA total unskilled 2600 562. 2964 skilled-Rs.. 2600 semiskilled.For that we have to find out the average of all India price index from Jan 2008 to June 2008.63 3606 (in round figure) skilled 3290 712 4202 now VDA has to increase w.f 01 Apr 2009.

= 772.67 SAY 677 NOW WE CAN CALCULATE VDA WEF 01 APR 2009 UNSKILLED------(677-522 )*2600 ----------------.11=3845 SKILLED----------(677-522)*3290 ------------.03=3373 SEMISKILLED-----(677-522)*2964 -----------------.92 522 NOW WAGES FOR SKILLED IS 3290+976.11 522 NOW MINIMUM WAGES FOR SEMI SKILLED IS 2964+880.=976.03 522 NOW MINIMUM WAGES for unskilled is 2600+772.y -------- TOTAL 4060 NOW WE HAVE TO DIVDE 4060 BY 6 TO GET AVERAGE WHICH COMES TO 676.=880.92=4267 this is how we calculate VDA .

Importance: y Protecting the value of Basic Salary Structure y Increase in cost of living .

y Technically there is no difference between FIXED DA and VARIABLE DA.09.2010 is 1000. y The price index is not going to come down say below 600 points. y This will mean that workers will now get VARIABLE DA in addition to FIXED DA. y 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. Both are taken into consideration for the purpose of calculation of retirement or terminal benefits viz leave encashment. beyond 600 points at the agreed rate. This is very much certain based on past experience. .Difference between DA/ F-IDA/ VDA y Suppose the price index for industrial workers as on 30. y 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. gratuity etc.

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‡ The inflation rate is the percentage change in the price level from the previous period. .‡ Inflation refers to a situation in which the economy¶s overall price level is rising.

.THE CONSUMER PRICE INDEX y The consumer price index (CPI) is a measure of the overall cost of the goods and services bought by a typical consumer. the typical family has to spend more dollars to maintain the same standard of living. y When the CPI rises. y The Bureau of Labor Statistics reports the CPI each month. y It is used to monitor changes in the cost of living over time.

The Bureau of Labor Statistics (BLS) identifies a market basket of goods and services the typical consumer buys.How the Consumer Price Index Is Calculated y Fix the Basket: Determine what prices are most important to the typical consumer. y Find the Prices: Find the prices of each of the goods and services in the basket for each point in time. 2. 1. . The BLS conducts monthly consumer surveys to set the weights for the prices of those goods and services.

y y Compute the inflation rate: The inflation rate is the percentage change in the price index from the preceding period. . making it the benchmark against which other years are compared.How the Consumer Price Index Is Calculated y Compute the Basket s Cost: Use the data on prices to calculate the cost of the basket of goods and services at different times. y Compute the index by dividing the price of the basket in one year by the price in the base year and multiplying by 100. Choose a Base Year and Compute the Index: Designate one year as the base year.

C I in Year 1 v 100 C I in Year 1 .How the Consumer Price Index Is Calculated y The Inflation Rate y The inflation rate is calculated as follows: Inflation Rate in Year 2 = C I in Year 2 .

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% Transportation 41% Housing Education and communication 6% 6% 6% 4% 4% Medical care Recreation Apparel Other goods and services .

Substitution bias Introduction of new goods Unmeasured quality changes . but it is not a perfect measure of the cost of living.Problems in Measuring the Cost of Living y The CPI is an accurate measure of the selected goods that make up the typical bundle.

The index overstates the increase in cost of living by not considering consumer substitution. . y y Consumers substitute toward goods that have become relatively less expensive.ySUBSTITUTION BIAS y The basket does not change to reflect consumer reaction to changes in relative prices.

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

the value of a dollar falls. y If the quality of a good falls from one year to the next. y The BLS tries to adjust the price for constant quality. but such differences are hard to measure. . the value of a dollar rises. even if the price of the good stays the same.y UNMEASURED QUALITY CHANGES y If the quality of a good rises from one year to the next. even if the price of the good stays the same.

y The issue is important because many government programs use the CPI to adjust for changes in the overall level of prices. introduction of new goods. y The CPI overstates inflation by about 1 percentage point per year .Problems in Measuring the Cost of Living y The substitution bias. and unmeasured quality changes cause the CPI to overstate the true cost of living.

whichever is higher 70 per cent of basic pay or 80 per cent of Rs.7000 Between Rs.7000 whichever is higher 60 per cent of basic pay or 70 per cent of Rs. 100 per cent of Basic Pay 80 per cent of basic pay or 100 per cent of Rs.12500 whichever is higher 1 2 3 4 5 .12500 Rate of neutralization for determining Dearness Allowances payable quarterly.Rate of neutralization Basic Pay Slabs Upto Rs.12500 Above Rs. All India Consumer Price Index Number.9500 Between Rs.5001 and Rs.7001 and Rs.5000 Between Rs.9501 and Rs.9500 whichever is higher 50 per cent of basic pay or 60 per cent of Rs.5000.

46 per cent units in Rubber Plantations and y 73.95 per cent units in Tea Plantations were paying dearness allowance to their employees.09 per cent of the units are paying dearness allowance as a separate component of wages/salaries in the Plantation Sector. y http://labourbureau.73 per cent units in Coffee Plantations.nic. y Industry-wise and Stratum-wise number of units paying DA as a separate component of wages/salaries.What is Industrial Dearness Allowance. y 62.in/OWS%20Chap%203. y It is observed that only 62. y At the industry level :y 51.htm .

. 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. after the World War I. y For instance. 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. the German government lowered the value of their currency by printing massive amount of notes. y your income may not increase at the same rate as inflation. These situations have invoked the curiosity of many about why does inflation occurs? When inflation affects an economy.How Inflation affects the cost of living y Inflation occurs when the total demand for goods and services in an economy exceeds the supply of the same.

 The WPI index that measures and tracks the changes in price of goods in the stages before the retail level. Although some countries still use the WPIs as a measure of inflation. heating. the huge jump in oil prices in the United States. For example. The adjustment is typically based on a price index such as the Consumer Price Index. and Gross National Product Index. . This affects transportation. and they are a group of the indicators that follow growth in the economy. many countries. and cuts into retail sales because of the squeeze on workers' budgets.CPI &WPI affects Coast of Living  Upward change in an employee's compensation because of inflation. Wholesale Price Index. Wholesale price indexes (WPIs) report monthly to show the average price changes of goods sold in bulk. COLA is sometimes built into labor contracts. including the United States. use the producer price index (PPI) instead. food. y COST OF LIVING ALLOWANCE (COLA)  The CPI can sometimes be affected by a large hike in price of one commodity.

UNION S HOLD ON DA & NEGOTIATIONS .

i. y The Indus.. except in certain circumstances stated therein.e. 1974 enhancing the dearness allowance with retrospective effect from January 1.y Section 2(b) of the Additional Emoluments (Compulsory Deposit) Act. y Section 6(2) (b) enjoins on the employer the duty to make deductions and y Section 115A of the Bombay Industrial Relations Act. 1974. award conformity with the settlement sometime in August-September. July 6. to remit to the nominated authority additional dearness allowance from the emoluments disbursed after the appointed day. Arrears of dearness allowance were paid after the appointed day. 1946 provides that if y As a result of NEGOTIATIONS between the employers and employees a settlement was entered into between the parties on June 28. 1974. 1974 defines additional dearness allowance to mean such dearness allowance as may be sanctioned from time to time after the appointed day. the award in such proceeding shall be made in terms of such agreement.trial Court before which certain disputes were pending gave the . any agreement is arrived at between the employer and employees who are parties to an industrial dispute pending before the industrial court. 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.

A increase will cost approximately Rs.A) for Central Government Employees and pensioners considering the high inflation in the past six months. The D.y The Union Cabinet (16th September. 2010) approved 10% hike in Dearness allowance (D. y Dearness Allowance increases twice in every year in January and July according to the price index to compensate the inflation.A will be 45% of the basic pay. y The D. 9303 crore per annum. y This D. y 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. .A is 35% with effect from 01st January 2010.

A overcome 50 % some daily allowances will increase 25% percent. y Those allowances are Children Education Allowance. y Some advances like Flood Advance. Cycle Allowance.Continued y This D. Conveyance Allowance.A declaration is important because as per sixth central pay commission. Festival Advance also will be increased by 25% when D.A declaration may overcome this limit as per the present trend. . Washing Allowance.A exceeds 50%. when the D. and Split Duty Allowance. Cash Handling Allowance. Child Care Allowance. y Next D.

Correlation Between Cost of Living Index & D. the DA admissible correlated to the level of inflation.A y The payment of dearness allowance stems from the need to protect the erosion in the real value of basic salary on account of inflation. is positively . y Consequently.

er e e si ear ess ll a ce e al t f t e e isti it t e asic a / e si it effect fr 1. onse uentl .1. 006 are t faci a l ss i fi ati f e si as a s ecial is e sati i t eir cases.1. a 1.12. t e element of earness Pension will e ist onl for t ose pensioners who ha e retire from ser ice up to 31. e er e . 006. asis . .Merger of Dearness allowance with basic pay/ pension to State Government employees/ pensioners with effect from 1.2006 1.10. e e si ers retiri et ee 1. a / irect t at i t e case f e isti e si ers.1. . a ces e al .2005. . . ear ess ll a ce e al t 0% of t e asic a oul e treate as asic a ur oses of computation of pension in respect of asic pa recei e t em prior to 1. t it e si a s isti ctl as ear ess Pe si .1.1. ear ess ll f t e rese t e si s all it effect fr 1.

y The merger of 50% Dearness Allowance sanctioned in this order shall not be admissible to part time employees. y The merger of 50% Dearness Allowance with basic pay will also apply to the teaching and non-teaching staff working in aided educational institutions.07. . y The Dearness Allowances equal to 50% of basic pay / pension converted y The expenditure shall be debited to the sub-detailed head of account 03 Dearness Pay under the respective detailed Head 03 Dearness Allowance. Dearness Pension. into Dearness Pay / Dearness pension respectively would be deducted from the existing rate of Dearness Allowance. y The expenditure in respect of Pensioners / Family Pensioners shall be debited to the detailed head of account 27.y 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. employees under local bodies. Pensions .

y Contribution towards Tier-I from arrears of DA is to be deducted.2006. it needs to be revised whenever there is any change in these elements . a part of the ³Dearness Allowance´ has been treated as Dearness Pay. y 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 1.2006.1. y Subsequently. Since the contribution is to be worked out at 10% of (Pay+ DP+DA). y The Dearness Allowances equal to 50% of basic pay / pension converted into y As per the New PENSION Scheme. Therefore. the total Dearness Allowance is to be taken into account for working out the contributions to Tier-I.Government has Allotted payment of Pension with Dearness Allowance y Decided to merge Dearness Allowance equal to 50% of the existing basis pay / pension with the basic pay / pension with effect from 1. Dearness Pay / Dearness pension respectively would be deducted from the existing rate of Dearness Allowance.1. this should also be reckoned for the purpose of contributions.

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