Dearness allowance is a part of person's salary, calculated as a percent of basic salary. This rate varies as per rural and urban areas. The amount paid is in regards of cost of living, which is calculated based on cost of living index.
The increase is in accordance with the accepted formula, which is based on the recommendations of the 6th Central Pay Commission.
The combined impact on the exchequer on account of both dearness allowance and dearness relief would be of the order of Rs.7474.53 crore per annum and Rs.8720.32 crore in the financial year 2012-13 (i.e. for a period of 14 months from January, 2012 to February, 2013).