After a long wait, the Central Government has finally approved the Eighth Pay Commission. This has brought happiness and relief to lakhs of government employees across the country. However, with every new pay commission a question arises: Why does dearness allowance become zero? Let us know the answer and the reason behind it.
What is the purpose of dearness allowance?
Dearness Allowance is one of the most important components of the salary of government employees. It was implemented to protect employees from inflation and rising costs of living. Dearness Allowance is reviewed every six months based on the Consumer Price Index to ensure that employees maintain their purchasing power despite market fluctuations.
Role of Pay Commission
Every 10 years, the Pay Commission reviews the entire pay structure of government employees. This is done to fix pay scales, adjust for inflation and bring government salaries in line with current economic realities. The Commission considers market prices, cost-of-living factors and inflation trends to propose a more sustainable pay model.
Merger of dearness allowance into basic salary
Before the implementation of the new pay commission, dearness allowance of employees usually accounted for a large portion of the salary. Sometimes, this share could exceed 40% of their basic salary. When the new pay structure is implemented, this dearness allowance is merged into the basic pay through a fitment factor.
Why does dearness allowance become zero?
When the dearness allowance is merged into the new basic pay, the inflation caused by the dearness allowance is already compensated. Therefore, under the new framework, dearness allowance technically gets reset to 0 per cent. This is because the revised basic pay now reflects inflation-adjusted figures. Then the dearness allowance starts increasing again based on the new inflation figures.
For example, if the basic pay of an employee before the Eighth Pay Commission was ₹40,000 and dearness allowance was 46%, then the component of dearness allowance was 46% of ₹40,000 or ₹18,400. Now, after implementation, if the fitment factor is 2.57, the new basic pay will be ₹40,000 × 2.57 = ₹1,02,800. Since inflation up to that point has already been deducted, dearness allowance will be reapplied at 0% on the new basic pay.
