Understanding DA vs. VDA: How Should They Be Paid and Included in Salaries?

Hello Seniors,

I would like to know the difference between DA and VDA. Also, what is the criteria to pay VDA? Can we include VDA in the gross salary or do we need to pay it separately? Are these two different? Kindly brief me on the same. I need to work on this urgently, so please suggest me on the same.

Regards,
Sreedevi

Understanding Wage and Salary Administration

In Wage and Salary Administration, the total consideration, both in cash and kind, payable by the employer to employees for their services can be divided into different components such as basic pay and other allowances. This can be done either suo motu by the employer or through collective bargaining. The monetary value of this total consideration is called gross wages/salary, based on which the employer must pay certain regular and occasional amounts under statutory heads like contributions to EPF, ESI, Bonus, Leave Salary, Gratuity, etc., which are known as indirect commitments.

Employers, guided by thrift and prudence, often prefer to reduce the CTC by adopting a salary break-up. Employees also accept this due to the increase in their take-home salary and tax benefits. Dearness allowance is one such component of the wage/salary structure.

The Concept of Dearness Allowance (D.A.)

The concept of dearness allowance, or D.A. for short, was introduced in India during World War II to offset the sudden and exorbitant rise in prices. It remains a regular practice to counter the inflationary effects on the wages/salary of the working classes in both industrial and other sectors. D.A., V.D.A., or Dearness Pay are essentially the same but differ in terms of the basis of calculation and cycle of implementation. Regardless of the calculation method and the periodicity of its revision, it forms part of the gross salary. When shown as a distinct component, it can reduce the burden of indirect commitments to some extent, such as in the case of gratuity payments. As far as I know, there is no legal compulsion to pay it separately.

Variable Dearness Allowance (V.D.A.)

When the quantum of D.A. and its periodicity of revision are determined either based on prevailing general price levels or linked to any Consumer Price Index, it is called Variable Dearness Allowance.

Regards,
[username]

Understanding Dearness Allowance (DA) and Variable Dearness Allowance (VDA)

Originally, the term Dearness Allowance depicts a variable allowance given to adjust against the cost of living (inflation). In India, it is linked with the All India Consumer Price Index (AICPI). The AICPI derives the index from a basket of food, clothing, fuel, and other essentials/commodities required for a family. For government employees, the DA is revised quarterly or semi-annually as an average of monthly DA. Therefore, this DA is referred to as Variable DA (VDA) but commonly known as DA.

Certain organizations may have both DA and VDA as components of their compensation/CTC. In this case, the DA is likely to be the Fixed DA. During wage revisions (e.g., 7th Pay commissions), the current VDA may be converted into the Fixed DA, and new VDA is initiated afresh or as per decided formulas. Hence, there could be both components, i.e., DA (FDA) and VDA.

Regards,
Shailesh Parikh