The government on Thursday froze inflation-linked allowance for its 1.1 crore employees and pensioners, a move states are likely to replicate, helping save a combined Rs 1.2 lakh crore that could be used to combat the coronavirus crisis.

Last month, the government had announced a 4 per cent increase in dearness allowance (DA) for its 50 lakh employees and 61 lakh pensioners beginning January 1, 2020. This was to cost Rs 27,100 crore in the current financial year 2020-21.

'In view of the crisis arising out of COVID-19, it has been decided that additional instalment of dearness allowance payable to central government employees and dearness relief (DR) to central government pensioners due from January 1, 2020, shall not be paid.

'The additional instalment of DA and DR due from July 1, 2020, and January 1, 2021, shall also not be paid,' the department of expenditure said in an office memorandum.

However, central government employees and pensioners will continue to receive DA and DR, respectively, at the current rate -- 17 per cent -- till June 30, 2021.

The department of expenditure, under the finance ministry, in the memorandum said no arrears will be paid from January 1, 2020, to June 30, 2021. However, for releasing the DA and DR due from July 1, 2021, the government will take into account the previous hike.

Generally, DA for government employees and pensioners is revised twice a year in January and July in line with inflation trend.

'As and when the decision to release the future instalment of DA and DR due from July 1, 2021, is taken by the government, the rates of DA and DR as effective from January 1, 2020, July 1, 2020, and January 1, 2021, will be restored prospectively and will be subsumed in the cumulative revised rate effective from July 1, 2021. No arrears for the period from January 1, 2020, till June 30, 2021, shall be paid,' the ministry.

According to sources, the combined savings on account of freezing of these instalments of DA and DR to central government employees and pensioners would be Rs 37,530 crore in the current financial year and 2021-22.

Generally, the states follow the Centre's order on DA and DR.

It is estimated that the savings due to suspension of these instalments of DA and DR of state government employees and pensioners will be Rs 82,566 crore, the sources said.

Thus, the combined savings of the Centre and states will be Rs 1.20 lakh crore, which will help in fighting the COVID-19 pandemic and its fallout.

Last month, the Union cabinet had approved a 4 per cent increase in DA for government employees and pensioners to 21 per cent. This decision was to be effective from January 1, 2020.

With Thursday's decision, this 4 per cent hike has been put on hold.

President Ram Nath Kovind, Vice President Venkaiah Naidu and Prime Minister Narendra Modi as well as Union ministers and MPs and governors of all states have taken a 30 per cent pay-cut for one year beginning April.

The Cabinet also approved the move to temporarily suspend MPLADS Fund of MPs for two years 2020-21 and 2021-22.

The money, saved through these efforts, will go to the Consolidated Fund of India and would be utilised for managing health services and the adverse impact of the COVID-19 pandemic in the country.

Besides the healthcare cost, the government is also faced with the additional burden of giving booster or stimulus to sectors and industries hit by a nationwide lockdown. The lockdown, which began on March 25, was last week extended until May 3.

Late last month, the government announced a Rs 1.7-lakh crore economic package, comprising free foodgrains and cooking gas to the poor and cash dole to poor women and elderly.

A second package, aimed at industries, is said to be in the works and is likely to be announced shortly.