The Centre has increased dearness allowance (DA) by 6 per cent to 51 per cent, benefiting over 50 lakh employees and 38 lakh pensioners.
The decision to hike the DA was taken by the Union Cabinet, sources said.
The new DA, which will be effective from January 1, is provided to government staff and pensioners to compensate them for rising prices.
Presently, the DA is paid at 45 per cent of the basic pay.
First Person: Rich Japan's stunning descent into misery
The increase in DA by 6 per cent, sources said, would be in accordance with the formula prescribed by the Sixth Pay Commission for central government employees.
The decision will provide direct relief to around 50 lakh employees and 38 lakh pensioners.
The DA is revised twice in year with effect from January 1 and July 1.
The relief comes amid high retail prices, as inflation has been ruling above 9 per cent.
Also See: Editor's Picks
The Consumer Price Index (Industrial Workers), which is the basis for revising dearness allowance, was 9.47 per cent in December and 9.30 per cent in January.
The headline inflation, based on movement in wholesale prices was 8.31 in February, much above the comfort level of 5-6 per cent.
The food inflation, too, was hovering above 9 per cent.