Dearness pay

Dearness pay was dearness allowance equal to 50% of existing basic pay, merged with basic pay and shown distinctly as a separate element, with effect from 1 April 2004 under Department of Expenditure Office Memorandum F. No. 105/1/2004-IC dated 1 March 2004. It counted as pay for allowances, transfer grant, retirement benefits, contribution to the General Provident Fund, licence fee, the monthly CGHS contribution and various advances. The 6th Central Pay Commission absorbed it into the revised pay structure from 1 January 2006, and no serving employee has drawn it since.

The order acted on paragraph 105.11 of the 5th Central Pay Commission report, which had recommended that dearness allowance be converted into dearness pay each time the consumer price index rose by 50% over the base index used by the last pay commission. The Government applied that recommendation once. It has never applied it again, and the 6th Central Pay Commission recommended in paragraph 4.1.18 of its report that dearness allowance should not be merged with basic pay at any stage.

That refusal is why dearness pay matters now. Many employees believe that dearness allowance merges into basic pay automatically whenever it crosses 50%, and cite 2004 as the precedent. The belief is two pay commissions out of date. Dearness allowance crossed 50% on 1 January 2024 and stands at 60% from 1 January 2026, and none of it has become pay.

This article sets out what dearness pay was, the exact list of purposes it counted for and the three it did not, how the residual dearness allowance was recomputed, the dearness pension that ran alongside it for pensioners, the clarifications that followed, how the 6th Central Pay Commission absorbed it into the 1.86 multiple and why it refused to keep the mechanism, and where the element still surfaces today.

What dearness pay was

Dearness pay was a portion of dearness allowance that had been reclassified as pay. Dearness allowance is a cost-of-living element revised twice a year against the AICPI-IW price index and paid on top of basic pay; it is not ordinarily counted as pay, so allowances expressed as a percentage of pay and the pension and gratuity formulas run on basic pay alone. The 2004 merger changed that for half of it.

Paragraph 2 of Office Memorandum F. No. 105/1/2004-IC dated 1 March 2004 records the decision in terms: with effect from 1 April 2004, dearness allowance equal to 50% of the existing basic pay was merged with basic pay and shown distinctly as dearness pay. The measure was framed as a conversion, not as an increase. The same paragraph directed that the dearness allowance converted into dearness pay be deducted from the existing rate of dearness allowance, so the employee did not draw the same half twice.

Two consequences followed at once. The employee’s pay for the specified purposes became basic pay plus dearness pay, a figure half again as large as basic pay. And the residual dearness allowance, at a rate reduced by 50 percentage points, was thereafter computed on that enlarged base rather than on basic pay alone.

The 5th Central Pay Commission recommendation in paragraph 105.11

The idea came from the 5th Central Pay Commission, which recommended in paragraph 105.11 of its report that dearness allowance should be converted into dearness pay each time the consumer price index increased by 50% over the base index used by the last pay commission. The Office Memorandum of 1 March 2004 quotes that recommendation as its opening recital.

The reasoning was that a large enough allowance stops being a top-up. Once dearness allowance reaches half of basic pay it is a permanent and substantial part of what an employee actually earns, and confining it to allowance status keeps it out of the benefits that turn on pay, chiefly the percentage allowances and the retirement benefits. Paragraph 4.1.3 of the 6th Central Pay Commission report summarises the 5th Commission’s position as conversion of dearness allowance into dearness pay each time the index rose 50% over the base, with dearness pay counting for all purposes including retirement benefits.

The Government did not adopt the recommendation in that form. It converted once, in 2004, rather than establishing a recurring rule, and it counted dearness pay for most purposes rather than for all of them. The 5th Central Pay Commission had also recommended that dearness allowance including dearness pay be paid net of taxes, which the Government rejected outright.

What dearness pay counted for, and what it did not

Dearness pay counted as pay for seven named purposes and was excluded from three. Paragraph 2 of Office Memorandum F. No. 105/1/2004-IC dated 1 March 2004 counted it for payment of allowances, transfer grant, retirement benefits, contribution to the General Provident Fund, licence fee, the monthly contribution for CGHS, and various advances. It then carved out leave travel concession, travelling allowance and daily allowance while on tour and on transfer, and government accommodation, each of which continued to be governed on the basis of basic pay alone.

Two rows of that table are routinely misread together. The licence fee charged for government accommodation was computed on basic pay plus dearness pay, while the entitlement to the accommodation itself, meaning the type and size of quarters a person could claim, stayed on basic pay alone. An employee therefore paid a higher licence fee without becoming eligible for a larger house.

The transfer entries split in the same way. Travelling allowance on transfer was excluded, but the composite transfer grant that forms part of it was not: paragraph 4.2.36 of the 6th Central Pay Commission report records that the grant was then equal to one month’s basic pay plus dearness pay. The quantum of the grant took dearness pay; the entitled class of travel and the fares did not.

The exclusions were not incidental drafting. Leave travel concession, travel entitlement and government accommodation are the three benefits keyed to status rather than to earnings, and holding them on basic pay alone kept the merger from reclassifying 50 lakh employees into higher travel and housing entitlements overnight.

How residual dearness allowance was computed after the merger

The dearness allowance formula acquired a subtraction of 50. Paragraph 4.1.17 of the 6th Central Pay Commission report gives the formula in force from 1 July 2004 as the 12 monthly average of the All India Consumer Price Index for Industrial Workers, less 306.33, divided by 306.33, multiplied by 100, and then reduced by 50, the result taken as the percentage increase in prices ignoring fractions at 100% neutralisation for all levels.

The base index itself did not move. Paragraph 4.1.5 of the report states that dearness allowance continued to be calculated with reference to the AICPI-IW average as on 1 January 1996 of 306.33 without changing the base as a consequence of the merger. The 50 was simply deducted at the end of the calculation.

Dearness allowance stood at 61% as on 1 January 2004 under the table in paragraph 4.1.4, so the residual rate from 1 April 2004 was 11%, payable on basic pay plus dearness pay. Paragraph 4.1.5 sets out the rates sanctioned afterwards on the unchanged base.

A worked example shows where the cash gain came from. An employee drawing basic pay of Rs. 10,000 on 31 March 2004 received dearness allowance of Rs. 6,100 at 61%, or Rs. 16,100 in all. From 1 April 2004 the same employee received basic pay of Rs. 10,000, dearness pay of Rs. 5,000, and dearness allowance at 11% on the combined Rs. 15,000, which is Rs. 1,650, or Rs. 16,650. The Rs. 550 monthly difference is the residual rate applied to the enlarged base, and it sat on top of the larger effect on the percentage allowances and on the pension and gratuity figures.

The base index of 306.33 that was never revised

Leaving the base index at 306.33 after converting 50 percentage points into pay produced over-neutralisation, and the 6th Central Pay Commission said so. Paragraph 4.1.18 of its report states that the corollary to the merger should necessarily have been a revision of the existing reference base of 306.33, that the new reference base should have been the 12 monthly average index at the point the index had risen by 50%, and that a higher base would have translated into a lower dearness allowance rate than the rates actually paid.

Paragraph 4.1.5 states the outcome plainly: salaries of government employees were being neutralised at more than 100%. That is the technical objection to the 2004 merger, and it is the reason the Commission treated conversion as a device that had to be paired with a base reset to be coherent.

The defect was arithmetic rather than administrative. Converting half the allowance into pay while keeping the same denominator means every later index rise is measured against a base that no longer corresponds to the pay actually being drawn, so each subsequent instalment slightly overcompensates. Over the seven instalments between 1 July 2004 and 1 July 2007, which took the rate from 14% to 41%, the effect compounded.

Dearness pension, the pensioner counterpart

Pensioners received the same merger in their own form. Paragraph 2 of Office Memorandum F. No. 105/1/2004-IC dated 1 March 2004 provided that in the case of existing pensioners, dearness relief equal to 50% of the present pension would be merged with pension from 1 April 2004 and shown distinctly as dearness pension, with the converted portion deducted from the existing rate of dearness relief. Department of Pension and Pensioners’ Welfare Office Memorandum No. 42/2/2004-P&PW(G) dated 15 March 2004 carried it into the pension rules.

Paragraph 3 of the 1 March 2004 order dealt with the cohort retiring across the merger date. To ensure that pensioners retiring between 1 April 2004 and 31 December 2005 faced no loss in fixation of pension, dearness allowance equal to 50% of basic pay was treated as basic pay for computing pension in respect of basic pay received before 1 April 2004. The same paragraph draws the consequence: the element of dearness pension exists only for pensioners who retired up to 31 March 2004, because everyone retiring later already had dearness pay inside the pay on which the pension was worked out.

The split matters for reading an old Pension Payment Order. A pre-April 2004 retiree’s entitlement was shown as basic pension plus dearness pension plus residual dearness relief; a retiree from later in 2004 or in 2005 shows a single, larger basic pension with no dearness pension line, because the merger had already been absorbed at fixation.

The clarifications of 26 October 2005

Four questions about dearness pension were settled by Department of Pension and Pensioners’ Welfare Office Memorandum No. 45/1/2004-P&PW(G) dated 26 October 2005, issued after consultation with the Ministry of Finance and the Ministry of Law, and in supersession of the earlier clarifications dated 27 January 2005 and 24 February 2005.

The first concerned the pension floor. The minimum basic pension remained Rs. 1,275 for those who retired up to 31 March 2004, with dearness relief equal to 50% of pension merged and shown distinctly as dearness pension; for those retiring on or after 1 April 2004, the basic pension or family pension was not to be less than Rs. 1,913, the earlier floor carrying the merged half. The order also directed that the Rs. 1,275 figure continue to be shown in the Pension Payment Order for the earlier class.

The second excluded a class of pensioner altogether. Re-employed pensioners and absorbees who are not entitled to dearness relief on their pension get no dearness pension, because the conversion operates on dearness relief and there is nothing to convert.

The third fixed the modified parity floor. From 1 April 2004, pension was not to be less than 50% of the minimum of the scale plus the dearness pay of the post, rather than 50% of the minimum of the scale alone, which lifted the floor for every post by half of its entry pay.

The fourth kept a recovery where it was. Licence fee under Rule 72(6) continued to be recovered from dearness relief only and not from dearness pension. For serving employees the licence fee was computed on basic pay plus dearness pay; for pensioners the recovery source was left untouched by the merger.

Tax treatment

Dearness pay was fully taxable as salary. Reclassifying part of an allowance as pay does not create an exemption, and the merged portion remained chargeable to income tax under the head Salaries for the whole of its existence between 1 April 2004 and 31 December 2005.

The 5th Central Pay Commission had proposed otherwise. Paragraph 4.1.3 of the 6th Central Pay Commission report records its recommendation that dearness allowance including dearness pay be paid net of tax, and the Government did not accept it. Nothing in Office Memorandum F. No. 105/1/2004-IC dated 1 March 2004 provides for any tax relief on the merged element.

The merger raised taxable salary rather than shielding it, because the allowances and terminal benefits computed on basic pay plus dearness pay all rose with it.

How the 6th Central Pay Commission ended it

Dearness pay lasted 21 months, and the 6th Central Pay Commission structure absorbed it from 1 January 2006. Rule 7 of the Central Civil Services (Revised Pay) Rules, 2008 fixed pay in the running pay band by multiplying pre-revised basic pay by 1.86 and rounding up to the next multiple of Rs. 10, with the grade pay of the post added on top. That multiple is basic pay of 100, plus dearness pay of 50, plus dearness allowance at the 24% in force on 1 January 2006 applied to the combined 150, which is 36.

The Commission had recommended a different figure. Paragraph 2.2.21 of its report fixed pay at basic pay plus dearness allowance at 74%, a multiple of 1.74, which notionally reversed the 2004 merger and paid the rate on basic pay alone. The Government kept the merger and paid the 24% on basic pay plus dearness pay, and the whole of the gap between 1.74 and 1.86 is that single decision.

From 1 January 2006 there was no dearness pay line on the pay slip, because the amount it represented had become part of the revised pay in the pay band itself, and dearness allowance restarted from zero on a new base. The fitment factor article sets out the conversion arithmetic in full.

One allowance was left stranded by the merger and had to be repaired later. Paragraph 4.10.14 of the 6th Central Pay Commission report records that the slab rates of compensation in lieu of quarters did not get revised when the Government merged 50% of dearness allowance with pay as dearness pay, while house rent allowance rates were percentage based and rose automatically, which disturbed the relativity between the two.

Why the 6th CPC refused a standing merger

The 6th Central Pay Commission declined to continue the conversion mechanism, and paragraph 4.1.18 gives two reasons. The first is the base-index defect: conversion of dearness allowance into dearness pay should invariably be accompanied by a simultaneous revision of the base index, which the 2004 merger did not do.

The second is that the new structure made conversion pointless. Increments under the pay band and grade pay system were payable as a percentage of the pay in the pay band and the grade pay on it, so pay itself grew with the price-linked component, and provision had been made for all allowances and benefits to be revised periodically against the price index. On that reasoning the Commission stated that it was not recommending merger of dearness allowance with basic pay at any stage.

A staff-side demand had asked for the opposite. Paragraph 4.1.6 records a demand that the 5th Commission’s principle of merging 50% of dearness allowance as dearness pay be modified to 25%, so that the conversion would happen twice as often. The Commission rejected the frequency change along with the mechanism, and also refused to move the revision cycle from six months to three under paragraph 4.1.19.

No dearness pay today, and no merger at 50%

There is no dearness pay in the current pay structure, and dearness allowance does not become pay at any rate. The 7th Central Pay Commission carried forward the 6th Commission’s position rather than the 5th Commission’s: the accumulated dearness allowance of 125% as on 1 January 2016 was absorbed into the 2.57 fitment factor that built the pay matrix and the counter was reset, which is a one-time step at the start of a new structure and not a recurring rule.

Dearness allowance crossing 50% on 1 January 2024 therefore created nothing resembling dearness pay. The rate has since risen to 60% of basic pay from 1 January 2026 under Department of Expenditure Office Memorandum No. 1/1(i)/2026-E.II(B) dated 22 April 2026, and the whole of it is paid as an allowance on top of basic pay.

The Government’s position on a fresh merger is on the parliamentary record. Answering Lok Sabha Unstarred Question No. 212 on 1 December 2025, the Minister of State for Finance, Pankaj Chaudhary, stated that no proposal regarding the merger of the existing dearness allowance with basic pay is under consideration with the Government at present. An employee expecting a merger at a milestone, on the strength of what happened in 2004, is applying a rule that the 6th Central Pay Commission recommended against in 2008 and that no order has revived.

What the 8th Central Pay Commission will do with accumulated dearness allowance is the fitment question, not the merger question. On implementation the accumulated rate is folded into revised pay and dearness allowance restarts at zero, as in 2006 and 2016.

Three distinct effects of a 50% dearness allowance rate

Three separate mechanisms have attached to a dearness allowance rate of 50%, and running them together is what keeps the merger misconception alive.

The first is the historical conversion. Under the 5th Central Pay Commission principle in paragraph 105.11, crossing the threshold led to half the dearness allowance becoming dearness pay, which happened once, on 1 April 2004. That mechanism ended on 1 January 2006.

The second is the allowance escalation. Certain fixed-rupee allowances rise by 25% each time dearness allowance crosses a 50% milestone, under pre-accepted 7th Central Pay Commission recommendations that apply without a fresh order, which is why the children education allowance and the hostel subsidy stepped up from 1 January 2024. Raising a fixed allowance is not converting an allowance into pay.

The third is the house rent allowance revision. Paragraph 3 of Office Memorandum No. 2/5/2017-E.II(B) dated 7 July 2017 provided that the rates of 24%, 16% and 8% of basic pay would be revised to 27%, 18% and 9% when dearness allowance crossed 25%, and further to 30%, 20% and 10% when it crossed 50%. The first step-up took effect from 1 July 2021, when the rate went from the frozen 17% to 28%, and the second from 1 January 2024. House rent allowance is still computed on basic pay alone; only the applicable slab moved.

Only the first of the three converted dearness allowance into pay, and it is the one that no longer exists. The second and third operate now, and neither changes what counts as pay.

Dearness pay, interim relief and the fitment merger

Three devices have fed cost-of-living compensation into pay, at three different moments, and they are distinct in payer, timing and effect.

Interim relief anticipates an award and adds money. Dearness pay changed the character of money already being drawn, and its cash gain came only from paying the residual rate on basic pay plus dearness pay. The fitment merger is neither: it is the accounting step that starts a new pay structure with the allowance counter at zero.

Dearness pay is the only one of the three that operated between commissions, and it is the one the current framework has no equivalent of. That absence is what is experienced as the missing merger at 50%.

Where dearness pay still appears

Dearness pay is spent as an entitlement but not as a figure. The pensions of employees who retired between 1 April 2004 and 31 December 2005 were fixed on basic pay plus dearness pay under paragraph 3 of Office Memorandum F. No. 105/1/2004-IC dated 1 March 2004, so the merged half sits inside the pre-revised pension that the 6th and 7th Commission revisions carried forward. Anyone tracing a revision of pension for that cohort works from a base that already includes it.

Dearness pension has also outlived dearness pay in the drafting of dearness relief orders. Paragraph 3 of the order of 4 April 2012, which raised dearness relief from 58% to 65% with effect from 1 January 2012, extends relief to absorbee pensioners whose one-third commuted portion has been restored, computed on the full pension together with dearness pension. The clause survives for a narrow class of pensioners whose entitlement was frozen before 2006.

Neither case creates a live dearness pay for a serving employee. The last day on which any central government employee drew it was 31 December 2005.

Related Articles

• Dearness allowance
• Dearness relief
• Dearness pension
• Interim relief
• 5th Central Pay Commission
• 6th Central Pay Commission
• 7th Central Pay Commission
• 8th Central Pay Commission
• Fitment factor
• Pay matrix
• Basic pay
• Grade pay
• Pay band
• Pay fixation
• AICPI-IW
• Expected DA
• House rent allowance
• City classification for HRA
• Transport allowance
• Children education allowance
• Composite transfer grant
• Daily allowance on tour
• Leave travel concession
• General Provident Fund
• Minimum pay
• Central government pension
• Revision of pension
• Commutation of pension
• Family pension
• Gratuity for central government employees
• Allowances for central government employees
• Abolished allowances under the 7th CPC
• Take-home salary for central government employees
• Department of Expenditure
• Department of Pension and Pensioners’ Welfare

External references

• Ministry of Finance, Department of Expenditure
• Office Memorandum F. No. 105/1/2004-IC dated 1 March 2004
• Department of Pension and Pensioners’ Welfare
• DoPPW clarification No. 45/1/2004-P&PW(G) dated 26 October 2005
• Central Pension Accounting Office
• Department of Personnel and Training
• Controller General of Accounts

References

1. Ministry of Finance, Department of Expenditure, Office Memorandum F. No. 105/1/2004-IC, dated 1 March 2004, on merger of 50% of dearness allowance and dearness relief with basic pay and pension as dearness pay and dearness pension with effect from 1 April 2004.
2. Report of the Fifth Central Pay Commission, paragraph 105.11: conversion of dearness allowance into dearness pay each time the consumer price index increases by 50% over the base index used by the last pay commission.
3. Report of the Sixth Central Pay Commission, paragraphs 4.1.3, 4.1.4 and 4.1.5, on the 5th Commission’s recommendations, the pre-merger dearness allowance rates and the rates sanctioned from 1 July 2004 on the unchanged base of 306.33.
4. Report of the Sixth Central Pay Commission, paragraph 4.1.17, on the dearness allowance formula in force from 1 July 2004 with the deduction of 50.
5. Report of the Sixth Central Pay Commission, paragraph 4.1.18, recommending no merger of dearness allowance with basic pay at any stage, and paragraph 4.1.6 on the staff-side demand to modify the merger principle from 50% to 25%.
6. Report of the Sixth Central Pay Commission, paragraph 2.2.21 (multiple of 1.74), paragraph 4.2.36 (composite transfer grant on basic pay plus dearness pay) and paragraph 4.10.14 (compensation in lieu of quarters not revised on the merger).
7. Central Civil Services (Revised Pay) Rules, 2008, Rule 7: fixation of initial pay in the revised pay structure at 1.86 times pre-revised basic pay.
8. Department of Pension and Pensioners’ Welfare, Office Memorandum No. 42/2/2004-P&PW(G), dated 15 March 2004, implementing the conversion of 50% of dearness relief into dearness pension.
9. Department of Pension and Pensioners’ Welfare, Office Memorandum No. 45/1/2004-P&PW(G), dated 26 October 2005, clarifying the minimum pension of Rs. 1,275 and Rs. 1,913, the exclusion of re-employed pensioners and absorbees, the floor of 50% of the minimum of the scale plus dearness pay, and the recovery of licence fee under Rule 72(6) from dearness relief only, in supersession of the Office Memoranda dated 27 January 2005 and 24 February 2005.
10. Ministry of Finance, Department of Expenditure, Office Memorandum No. 2/5/2017-E.II(B), dated 7 July 2017, paragraph 3, on the house rent allowance rates and their dearness-allowance-linked revision at the 25% and 50% thresholds.
11. Ministry of Finance, Department of Expenditure, Office Memorandum No. 1/1(i)/2026-E.II(B), dated 22 April 2026, on dearness allowance at 60% of basic pay from 1 January 2026.
12. Lok Sabha Unstarred Question No. 212, answered on 1 December 2025 by the Minister of State for Finance, stating that no proposal regarding the merger of the existing dearness allowance with basic pay is under consideration.