The decision comes ahead of Lok Sabha elections which are likely to be announced by the middle of this month.
Briefing the media about the cabinet decisions, Union Commerce and Industry Minister Piyush Goyal said 49.18 lakh employees and 67.95 lakh pensioners will benefit from the government decision.
He said the decision would cost Rs 12,868.72 crore per annum to the exchequer.
The cabinet meeting was chaired by Prime Minister Narendra Modi.
The additional instalment of Dearness Allowance (DA) and Dearness Relief (DR) to pensioners represents an increase of 4 per cent over the existing rate of 46 per cent of the basic pay/pension to compensate against price rise.
An official release said that the increase is in accordance with the accepted formula, which is based on the recommendations of the Seventh Central Pay Commission.
