Differential DA/DR Rates For Serving & Retired Employees Without Rational Nexus To Inflationary Objective Violate Article 14: Supreme Court
The Court noted that once state extends inflation-linked benefits to both employees and pensioners, it cannot discriminate in rate of enhancement.
The Supreme Court has held that once the State decides to grant dearness allowance (DA) to serving employees and dearness relief (DR) to pensioners to offset inflation, it cannot prescribe differential rates of enhancement, as such classification lacks a rational nexus with the common objective and violates Article 14 of the Constitution of India. Accordingly, the Bench upheld the Kerala High Court judgment which had struck down differential enhancement rates of DA and DR granted to employees and pensioners of the Kerala State Road Transport Corporation (KSRTC).
The Court clarified that while employees and pensioners may constitute distinct classes for certain purposes, any differentiation in the rate of inflation-linked benefits must satisfy the twin tests of reasonable classification. Where the objective, mitigating inflation, is identical and impacts both groups equally, unequal rates of increase would be arbitrary and constitutionally impermissible.
Justice Manoj Misra and Justice Prasanna B. Varale observed, “…the retired employees are not only entitled to pension but also dearness relief, which is revisable from time to time, based on inflation. Thus, the issue is not of entitlement to the benefit but of differential rates at which those benefits are provided, dependent on whether the recipient is a serving or a retired employee. In our view, when those benefits serve a common purpose and are linked to inflation, and inflationary pressures do not discriminate between a serving employee and a pensioner, fixing different rates of enhancement of dearness allowance and dearness relief have no rational nexus to the object sought to be achieved and is clearly discriminatory as well as arbitrary”.
Senior Advocate Jaideep Gupta appeared for the State, Senior Advocate P.V. Dinesh appeared for KSRTC and Senior Advocate V. Chitambaresh, appeared for the respondents-employees.
For the facts, retired employees of KSRTC challenged a government order enhancing DA for serving employees by 14% while increasing DR for pensioners by only 11%, both effective from March 2021. The petitioners contended that such differential treatment, despite both benefits being linked to inflation, was discriminatory.
A Single Judge-Bench of the High Court dismissed the writ petitions, holding that employees and pensioners formed distinct classes. However, the Division Bench reversed this finding, holding that once the State decided to extend inflation-mitigating benefits to both groups, differential rates without justification violated Article 14 of the Constitution of India.
Before the Supreme Court, the State and KSRTC argued that financial constraints and the distinct status of employees and pensioners justified differential rates. It was contended that policy decisions based on economic considerations should not be interfered with.
Rejecting these submissions, the Court held that the object of both DA and DR is identical, to neutralise inflationary pressures. Since inflation affects serving employees and pensioners alike, any differentiation in the rate of increase must bear a rational nexus to this objective. The Court found that no such nexus existed, rendering the classification arbitrary.
However, the Bench also noted that “No doubt a financial crunch might be a guiding factor to defer disbursement of certain benefits or may justify separate dates for implementation of beneficial schemes. But once a decision is taken to provide certain allowances as also to increase them, based on inflation, fixing a higher rate of increase for the ones who are serving than the ones who have retired, would be arbitrary and violative of Article 14 of the Constitution…”.
Dismissing the appeals, the Court affirmed that financial constraints may justify deferral or phased implementation of benefits, but cannot sustain unequal treatment in the rate of inflation-indexed allowances once granted.
Cause Title: The State of Kerala v. M. Vijayakumar & Ors. [Neutral Citation: 2026 INSC 352]
Appearances:
Appellant: Jaideep Gupta, Sr. Adv., C. K. Sasi, AOR, Meena K Poulose, Riddhi Bose, Racheeta Chawla, Sampriti Bakshi, Siddharth Banerjee, Deepak Prakash, AOR, Sriram P., Jyoti Pandey, Divyangna Malik, Rahul Suresh, Shivangi Rajawat, Rahul Rajeev, Manshi Sinha, Ridhika Singh, Sankalp Tewari, Daksh Rathi, Snehil Singh, Advocates.
Respondents: V. Chitambaresh, Sr. Adv., Vipin Nair, AOR, Aditya Narendranath, P B Sashaankh, Haresh Nair, M.B. Ramya, Deeksha Gupta, Puspita Basak, C. K. Sasi, AOR, Meena K Poulose, Deepak Prakash, Advocates.