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 hiNotably, 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.kes and corresponding increase in Dearness Relief (DR).
Since then, multiple state governments have also increased DA and DR to close gaps in payment with the central government.
How is DA hike calculated? Formula explained
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:
- 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.
Why are employees seeking change in DA calculation?
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.
Calling for a complete overhaul of the index, it has proposed creation of an employee-specific cost-of-living index that gives due weight to changes in expenditure and better recognises elderly care expenses in pay and pension revisions under the 8th CPC.
Diwali gift: Can we expect second DA hike in 2026?
Notably, employees and pensioners were expecting a second hike announcement this year. There was hope that a hike would come in July and based on data trends over the past months, there was expectation for a 3-4% DA hike. The final revision, however, will depend on the latest AICPI-IW data and the Centre’s approval.
However, with July now past, beneficiaries could still see a second hike announced sometime in the second half of the year. Considering precedent in the last two years — Labour and Employment Minister Ashwini Vaishnaw in October 2025 announced 3% DA hike, increasing the component to 53% of basic pay; and in 2024 announced an increase ahead of the Diwali festive season.
This year, Diwali is in November, so beneficiaries could expect a “Diwali gift” sometime in October or November.
Radhika Goyal is Author of Taxconcept Gurugram head office, for deeply reported tax, gst and income tax articles on issues that matter. He splits her time between New Delhi and Bengaluru, and has worked as a reporter, a podcaster and an editor for publications across India.