VDA explained: variable dearness allowance in minimum wages

What exactly is VDA?

The Code on Wages, 2019 says a minimum rate of wages may consist of a basic rate of wages and an allowance "adjusted, at such intervals and in such manner as the appropriate Government may direct, to accord as nearly as practicable with the variation in the cost of living index number applicable to such workers". The Code calls it the cost of living allowance. Minimum wage notifications usually call it variable dearness allowance, or VDA, and some states use a different label such as special allowance.

The Code also allows the government to notify an all-inclusive rate instead, so not every state splits its minimum wage into basic and VDA. Read your state's notification for the category of work you supply (for example security or housekeeping), the skill level and the zone.

How and when is VDA revised?

For employment where the central government is the appropriate government, rule 4 of the Code on Wages (Central) Rules, 2026 says the cost of living allowance is computed once before 1 April and then before 1 October every year. It is based on the average Consumer Price Index Number for Industrial Workers published by the Labour Bureau.

State governments set their own intervals for employment in the state sphere, which covers many private security, housekeeping and construction contracts. Many states revise twice a year, but the months differ from state to state. Find your state's latest notification on its labour department website and note the effective date. That date, not the day you hear about it, is when the new rate becomes payable.

How does VDA turn into a daily or monthly rate?

Notifications state a rate per day, per month or both. In the central sphere, rule 3 of the 2026 central rules fixes minimum wages on a daily basis, and says the daily rate is divided by eight for an hourly rate and multiplied by twenty-six for a monthly rate, with fractions of one-half or more rounded up. So a central-sphere daily rate of ₹700 is ₹18,200 a month. State notifications may convert differently; follow the one that applies.

Worked example: what a ₹400 VDA rise costs a contractor

Say a staff member's minimum wage is basic ₹15,000 + VDA ₹3,000 a month, and the VDA rises by ₹400 from the next revision date. The staff member's wage goes up by ₹400. But your cost per post rises by more, because PF, ESI, bonus, the reliever and your service charge are all worked out on the wage. For a 7-day post (reliever on, PF 13%, ESI 3.25%, bonus 8.33%, uniform ₹500, service charge 10%):

Each line (PF, ESI, bonus and so on) is rounded to the paisa before it is added, the same way our calculator and costing sheet work, so the figures add up line by line; rounding only once at the end can differ by a few paise. Every ₹1 of VDA becomes about ₹1.60 of cost per post on these assumptions. If your contract rate does not move, that difference comes out of your margin every month until it does. Run your own numbers in the manpower rate calculator, and see how to pass a revision on to your client.

HaazriPro works this out every month from your attendance, for every staff member and site. Start 30-day free trial  →

Who has to pay the new VDA, and from when?

You, as the employer, must pay at least the notified minimum wage, including the revised VDA, from its effective date. That applies whether or not your client has agreed a new rate yet. A common mistake is to keep paying last period's rate until the client approves a revision. The shortfall is still owed to the staff, and the arrears grow every month.

Your salary sheet should therefore change on the effective date of each revision, even if the bill to the client changes later. If you use a daily rate for some staff and a monthly rate for others, update both.

How do you keep track of revisions?

1. List every combination you supply: state, category of work, skill level and zone. A security agency working in two zones of one state may have two rates.
2. Note each notification's effective date and keep a copy of the notification with your wage records.
3. Recalculate the wage and the cost per post as soon as the new VDA is published. The manpower costing sheet updates every line when you change the wage.
4. Update the salary sheet from the effective date, and pay arrears if the notification came out after the date.
5. Write to every client whose contract allows a revision, with the notification attached.

Is VDA part of "wages" for PF, ESI and bonus?

Under the Code on Wages, "wages" includes basic pay and dearness allowance. That is why tender costing sheets work out PF, ESI and bonus on basic + VDA, as our rate per post guide does. The details of each contribution, and any wage ceilings, come from the Code on Social Security and its notifications, so confirm them with your CA.

Sources

• Code on Wages, 2019, sections 2(y), 7 and 8 (India Code)
• Code on Wages (Central) Rules, 2026, rules 3 and 4, G.S.R. 343(E), 8 May 2026 (eGazette)
• PIB, 21 Nov 2025: the four Labour Codes made effective
• Ministry of Labour: FAQs on the Labour Codes, transition of rules

This guide explains the rules in plain language. It is not legal or tax advice. Laws and rates change, so check your state's current minimum wage notification and confirm with your CA before you act on it.