Dearness allowance (DA) and city compensatory allowance (CCA) now form integral part of most wage structures. The general principle underlying these allowances is to neutralize at least a portion of the increase in the cost of living. Where these allowances do not form part of the wage structure, ad hoc and lump sum increases in pay are unilaterally announced by managements to partially provide for such neutralization.

It may be observed in certain private sector organizations which follow both the systems, the ad hoc pay increases are (usually for staff and managerial employees) at least equal to the increase in DA sanctioned to those governed by the DA scheme (usually workmen) since the time ad hoc pay increase was sanctioned last till the current ad hoc pay increase. Wage and salary increase related to increase in cost of living usually poses additional burden on the employer without corresponding improvement in productivity. The additional financial burden is met by adjusting the prices, if the market can bear and the public policy allows. Otherwise, the pressure is on firms to cut costs elsewhere or seek productivity improvements to absorb the increase in wage costs.

The payment of dearness allowance facilitates employees and workers to face the price increase or inflation of prices of goods and services consumed by him. The onslaught of price increase has a major bearing on the living conditions of the labour. The increasing prices reduce the compensation to nothing and the money’s worth is coming down based on the level of inflation. The payment of dearness allowance, which may be a fixed percentage on the basic wage, enables the employees to face the increasing prices.

As per Assessment Year 2017-18, Dearness Allowance is completely taxable for individuals who are salaried employees. In case employees are provided with rent free accommodation that is unfurnished wherein all prerequisites are met, Dearness allowance is a part of the