The Government of India pays a certain amount to all public sector employees, and pensioners towards "cost of living adjustments" and this is called Dearness Allowance (DA). Both employees in India and Bangladesh are eligible for this DA component.
Dearness Allowance was introduced after the Second World War. The formula for calculating DA is revamped since 2006 and is as follows:
Dearness Allowance % = ((Average of AICPI which is All India Consumer Price Index (Base Year 2001=100) for the past 12 months -115.76)/115.76)*100
Dearness Allowance % = ((Average of AICPI which is All India Consumer Price Index (Base Year 2001=100) for the past 3 months -126.33)/126.33)*100
Industrial dearness allowance or IDA is applicable to employees of the public sector enterprises. The IDA has recently been increased by 5% to benefit every board employees, officers, and executives of the central PSUs (Public sector employees).
In order to compensate for the rising inflation rate IDA is revised quarterly based on the movement of the Consumer Price Index (CPI).
VAD or Variable dearness allowance is for Central Government Employees and is revised every six months. This is based on the increase or decrease in the consumer price index, this is termed as VAD and the Dearness allowance is revised based on this.
Just as the pension of the public sector employees is revised whenever a new salary structure takes shape, similarly Dearness allowance when increased, the pension for the retired public sector employees is also increased. This applies to both family and regular pension.