DA update: How is dearness allowance calculated? Here's why there is demand for change in the formula

Dearness Allowance (DA) is a percentage of the basic salary component for central government employees and pensioners which seeks to address rising cost-of-living. It is reviewed twice a year, new announcements are usually made annually in March and October, with rollouts in July the same year and January in the next year.

Over 1 crore workers, comprising nearly 50 lakh central government employees and close to 65 lakh central government pensioners, including defence and railway personnel and retirees, benefit from the DA hikes and corresponding increase in Dearness Relief (DR).

Notably, DA was last revised by 2% in April this year, taking it from 58% to 60% of basic salary, with effect from 1 January 2026. In the following months, the Indian Banks' Association ( IBA ) announced revised DA and DR for workmen and officer employees across levels for the months of May, June and July 2026. And later, the Indian Railways also announced a 2% DA and DR hike for its personnel.

Since then, multiple state governments have also increased DA and DR to close gaps in payment with the central government.

DA hikes are calculated based using data from the 12-month average of the Labour Bureau's All India Consumer Price Index for Industrial Workers (AICPI-IW), as prescribed by the 7th central pay commission (CPC).

The index measures retail inflation by tracking fluctuations in the prices of goods and services consumed by industrial workers.The formula used is as follows, according to Clear Tax:

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

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

The All India Defence Employees’ Federation (AIDEF) has in a memorandum to the 8th CPC panel sought a change in how dearness allowance is calculated, saying that the current formula does not adequately reflect actual cost of living when it comes to mitigating inflation pressure on households.

As per the AIDEF , while food and beverage account for only 36.75% of the AICPI index, categories and aspects such as healthcare, housing, transport, communication and digital services have received greater weightage, despite generally experiencing more enduring price movements and changes. It also categorically stated that the revised CPI basket, introduced in FY23, does not fully capture increase in food commodity prices and seasonal agricultural products.

It thus argued that employees, especially those on lower pay grades, spend a larger percentage of their earnings on food, education, healthcare, house rent, medicines and other essentials — which rise faster than overall Consumer Price Index ( CPI ) inflation, and thus periodic DR revisions may not fully protect them.

Notably, India’s retail inflation accelerated in August 2026, with consumers facing higher prices for several food items.