Systems Of Payments Of Dearness Allowance Business Essay

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5/12/16 Business Reference this

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Normally remuneration package to employees were consisting of basic wage and dearness allowance. In due course of time due to changes in job situations, changing environment especially due to rising prices the basic wage and dearness allowance together were not found adequate as remuneration package provided to employees.

In order to take care of this situation employers have introduced various types of allowances and fringe benefits to make the total compensation package adequate so that employees may be able to fulfill their needs and discharge their duties efficiently.


Basic Wage is fixed on the basis of weightage given to jobs in an organisational context at various levels on the basis of skills, efforts, and qualifications etc. which are required to perform those jobs. Determination of weightage given to each job is done on the basis of studies carried out by industrial engineers along with other experts. Practices prevailing in other similar organisations are also taken into consideration.


Employees are employed with a particular wage or salary rate. In due course of time due to price increase, the real income of employees goes down. It means with the same level of wages employees are unable to buy goods and services, which they were able to buy before increase in prices. Dearness Allowance is paid to employees by way of compensating them for the loss of real income caused to them by increase in the cost of living due to increase in prices.


The system of payment of Dearness Allowance is mainly classified into two categories. They are: –

Not linked to consumer price index numbers and

Linked to consumer price index numbers.

(i) Not linked to consumer price index numbers

(A) Flat Rate: – Flat Rate system of payment is a method under which a fixed amount is paid to all employees irrespective of their categories and wage scales. The practice of paying Dearness Allowance at a fixed rate is regardless of any change in the consumer price index.

(B) Graduated Scale: – Workers belonging to higher income groups objected to the award of the same amount of Dearness Allowance to all employees irrespective of their wages or salaries. With this background the graduated scale system came into existence.

According to this method Dearness Allowance is paid on a graduated scale according to various wage scales. On the basis of different wage scale the workers are divided into groups. Dearness allowance increases with each scale of salary increase, but after a limit there is no increase in the amount of Dearness allowance, whatever the wage rate is.

A minimum amount of dearness allowance is also set for the workers in each scale, below which the dearness allowance is not allowed to fall. This method is considered to be equitable and hence it is quite popular.

(ii) Linked to consumer price index numbers

Under this system the dearness allowance is linked with the consumer price index number.

(A) Flat rate: – In this method dearness allowance rate per point or scale is fixed and this varies only with variations in points of consumer price index numbers.

(B)As a percentage of Pay: – In this method the dearness allowance is fixed. It is calculated as the percentage of pay per slab of the consumer price index numbers.

The dearness allowance is expressed as a fixed percentage of pay and equated to a scale of points of the consumer price index. The system of dearness allowance being linked with consumer price index is in vogue today.

Prevalent Practice of Paying Dearness Allowance

The payment of Dearness Allowance for central government employees is based on the recommendation of the Pay Commissions.

In the banking sector Dearness Allowance is paid as per the Desai Award. Under this dearness allowance is paid at a rate of 3 percent for every 4 points rise over 100 in the quarterly average of the consumer price index of the working class.

In various other industries and commercial houses, payment of dearness allowance is paid in common according to the scales. In many companies a 100 percent neutralisation system has been introduced against the rise in prices. This implies that the employees are under complete protection against the rising prices. On the other hand some organisations have provided a ceiling on the payment of dearness allowances, in terms of maximum amount of dearness allowance payable to a person.

Dearness Allowance (DA)

DA not linked to consumer price index number

DA Linked to consumer price index number

Flat Rate i.e. a fixed amount paid to all employees irrespective of their categories

Graduated Scale i.e. D.A. is paid to employees according to various wage scales.

Flat Rate i.e. in this D.A. rate per slab is fixed and the rate varies with the variation in the consumer price index.

D.A. as percentage of pay i.e. D.A. is paid as the percentage of pay per slab of the consumer price index.

Systems of Payments of Dearness Allowance


Apart from the basic Dearness allowance, many other allowances are paid to employees to compensate them adequately so that the total package of remuneration provides them suitable compensation package. The various allowances given to the employees are:-

(i) House Rent Allowance (HRA):- Organisations are set up in various types of locations such as urban centres; industrial belt etc.where houses are not available at a reasonable rent. If the employees are required to pay house rent as per the prevailing market rates, a substantial portion of their wages will go as house rent and the employees will not be left with sufficient money to meet their other requirements.

Hence HRA is paid to the employees enabling them to pay house rent for a suitable accommodation. It varies according to the cost of living in different cities and places.

Employees are paid HRA as per their slabs in their wages and salaries. This allowance is not considered as wages. The HRA shall also not be considered for any direct payment like gratuity, overtime, provident fund etc.

(ii) Leave Travel Allowance (LTA):- Employees while working seldom get opportunity to visit places where they can go and spend sometime along with the members of their families to get relaxed and reenergized for the work to be continued with zeal and enthusiasm. For such purpose employees are also willing to visit their native places.

Many organisations have introduced schemes commonly called Leave Travel Assistance (LTA)/Leave Travel Concession (LTC) etc. and this facility facilitates the employees to go to their home town or places for relaxation and reenergising.

Organisations have different types of practices for various categories of employees.

Normally employees who have completed a few years of service satisfactorily are entitled to LTA/LTC.

(iii) Washing Allowance: – While employees are working in various industrial processes, various kind of dirt gets accumulated on their body and uniform. If the employees do not keep themselves clean, they are likely to get different types of diseases.

A particular amount is paid as washing allowance to certain categories of employees and they are expected to keep themselves clean. In some organisation duty uniforms are provided to front line employees who directly come in touch with customers’. These employees are given washing allowance and are expected to keep their uniforms clean and make better presentation before the customer.

Once washing allowance is provided, the employers are in a position to enforce a standard of cleanliness on the workforce which will ultimately force the employees to keep themselves clean and in due course of time, the organisation will have its own standard of cleanliness.

(iv) Conveyance Allowance: – For smooth and efficient functioning of any organisation, employees are required to come to work place in time. Employees who neither have got a residence in the housing colony nor at any nearby places, commutes everyday distance by various means while coming to -work place. While commuting employees loose hilt of time and energy and after reaching work place they find themselves exhausted.

In order to facilitate employees to come to the work place comfortably and in time, employers provide conveyance allowance to the employees for availing better transport service, or maintaining and using own vehicle. The conveyance allowance is paid to employees for the days in which he receives normal wages. This however is not paid for days on which he is on leave without pay.

(v) Shift Allowance (SA):- Some organisations are required to work continuously under shift system because of the nature of production or service they have. Normally there are three shifts 6 A.M. to 2 P.M., 2 P.M. to 10 P.M. and 10 P.M. to 6 A.M. In order to establish balance among employees, so far shift duty is concerned; the employees are rotated among these three shifts. It implies that all employees will get by rotation duties at night shift equally.

However there are organisations where a few employees are required to work more in night shifts and rotations are not possible. They are paid an additional allowance called night shift allowance because they do jobs frequently during night hours which is strenuous. The rate of SA varies from organisation to organisation.

(vi) Cash Handling Allowance: – There are organisations where one particular category of employees handles a lot of cash (currencies and coins) of various denominations. Their job is to receive/pay, transfer cash amount. While doing so, they are required to count cash correctly. Sometimes by way of genuine error, they receive less money, pay more money and also receive bad currencies and coins.

In such situation they are required to compensate the loss caused to the employers due to such error. Thus an element of risk is involved. In order to cover this risk element, these employees receive this allowance on regular basis.

(vii)Lunch Allowance and Dinner Allowance: – Those employees, who are required to do the work away from the usual place of duty during the lunch or dinner period, are paid lunch & dinner allowance.

(viii)Education Allowance: – The education allowance is paid to the employees to make the package more attractive and facilitate greater spirit to educate their children.

(ix) Underground Allowance: – All employees working in underground operations are entitled to this allowance because the underground job is more strenuous and risky.

(x) Outstation Allowance: – This allowance is paid to all employees on outstation duty.

(xi) Servant Allowance: – In order to enable the executives to work in a relax mind and free from household duties, they are provided servants or allowance enabling them keep servants.

(xii)Social Security Allowance: – This allowance is paid to employees to help them to protect themselves and their families in an unforeseen situation in life. ‘The employers get their employees insured under various types of social security schemes. The amount for the insurance schemes is paid by the employers.

(xiii) City Compensatory Allowance: – In cities due to high prices the cost of living remains higher. Employees posted in these cities are paid city compensatory allowance by way of compensating them against loss of real income caused to them due to higher consumer price index prevailing there. This allowance varies in rates according to consumer price index prevailing in various categories of cities.

(xiv) Overtime Allowance: Daily working hours for workers are prescribed under various acts’ Workers working for more than the prescribed hours are entitled to receive overtime payments, which is normally double the ordinary rate of wages.


When, an organisation engages employees, it look into also their overall welfare and efficient. In addition to the basic wage, dearness allowance and other allowances paid to the employees, the employers provide them with a series of benefits so that they can carry out their function efficiently. The fringe component includes a number of diverse items. Finally, salaries and benefits together make up the total remuneration of an employee.

The various fringe benefits are as follows:

(i) Holiday Homes: – For the employee the award of a holiday trip at a leisurely place provides an excellent opportunity to relax with his family. If employees want to visit various important places and various tourist places, the expenses are substantial. Thus in order to facilitate such visits for relaxation and reenergization, organisations construct holiday homes. A nominal rate is charged from the employees for the use of these holiday homes. Different types of holiday homes are provided for different categories of employees.

(ii) Medical Facilities: – In order to ensure that all is well with the employees, immediate medical attention is provided at the workplace. Organisations set up own dispensaries and hospitals where treatment and medicine are provided free of cost or at nominal charges. Incase organisation is unable to provide specialised medical services, employees are referred to outside hospital and dispensaries and expenses are borne by the employers. Some times employers send their employees to abroad also for medical treatment.

(iii) Subsidized meal: – If meal is not provided at the workplace, many employees will go to their residence regularly for taking meal and come to workplace. While doing so the employees will waste time and energy in commuting the distance between the workplace and residence. They may not get even sufficient time for taking meal comfortably at their residence. Certain categories of employees require food with high calories which they may not get from the food prepared at their residence. In consideration of the above situations, employers provide subsidised meals to employees for upkeeping the efficiency.

(iv) Car subsidy: – In some organisation full loans or partial loans for purchase of cars are provided. At certain intervals, when the car becomes old, in some organisations there is provision for a second loan. It helps the executives to maintain status, standard and efficiency.

(v) Subsidized purchases: -With a view to help the employees to purchase company’s product, such as car, refrigerator, television etc. discounts are given or tax is not charged when products are purchased by them. Employees feel comfortable when they get company’s product at a cheaper rate and in turn the company gets customer at doorstep.

(vi) Low interest loan: – In order to help the employees in times of need and maintain a comfortable standard of living some organisations grant low interest loans for wedding of dependants, purchase of house, consumer items etc.

(vii) Children’s education: – When organisations are set up it is found that under normal situations there is dearth of good schools and even if good schools are there, employee’s children have difficulty in getting admission or they are unable to admit their children at all. It becomes a matter of great concern for the employees.

(viii) Some employees on account of this look for transfer and postings at particular place which the companies cannot afford to do and it is also not guaranted that even if the person is transfered, this problem will be solved. Keeping in view the need of the situation organisations are providing various types of facilities for the education of employee’s children which are as follows: –

Schools are provided by the company where nominal fee is charged.

Companies give donation to some schools and ask for reservation in admission of children of

employees of the company.

Company provides scholarship to meritorious children of employees of the company.

Sometimes if good schools are not there in the vicinity, the company provides lumpsump amount

as grant to the employees enabling them to send their children to other places.

(ix) Banks, post offices and other recreational facilities: There are organisations which are employing large number of employees. These employees require services of day to day importance like banks, post office, market & shopping complex etc. Organisations provide building for banks, post offices on nominal rents so that the employees are not required to travel a long distance to avail such services.

Employees also require facilities to carry out recreational activities. Organisations provide infrastructural facilities fake club house, playground, stadium, auditorium, community halls where various recreational activities are carried out. With the provision of such benefits the employees are able to attain a better standard of diving and spend active and peaceful social life.


Q1. Explain the significance of dearness allowance in the remuneration paid to the employees?

Q2. How the system of payment of Dearness Allowance is mainly classified?

Q3. Explain the other allowances given to the employees to compensate them?

Q4. What is fringe benefit? Enumerate the various types of fringe benefits given to the employees?

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