Dearness Allowance Last Updated : 10 Jul 2020

Dearness Allowance is cost of living adjustment allowance which the government pays to the employees of the public sector as well as pensioners of the same. DA component of the salary is applicable to both employees in India and Bangladesh.

Dearness Allowance can be basically understood as a component of salary which is some fixed percentage of the basic salary, aimed at hedging the impact of inflation. Since, DA is directly related to the cost of living, the DA component is different for different employees based on their location. This means DA is different for employees in the urban sector, semi-urban sector or the rural sector.

Dearness Allowance
Dearness Allowance

Dearness Allowance Under Income Tax

As per Assessment Year 2017-18, Dearness Allowance is completely taxable for individuals who are salaried employees. In case employees are provided with rent free accommodation that is unfurnished wherein all prerequisites are met, Dearness allowance is a part of the salary to the extent wherein it forms a part of the retirement benefit salary.

The Income Tax Act mandates that tax liability for Dearness allowance will have to be declared in the filed returns.

How to Calculate Dearness Allowance?

After the Second World War, DA component was introduced by the government. After 2006, the formula for calculating dearness allowance has changed and currently DA is calculated as follows,

For Central Government employees:

Dearness Allowance % = ((Average of AICPI (Base Year 2001=100) for the past 12 months -115.76)/115.76)*100

For Central public sector employees:

Dearness Allowance % = ((Average of AICPI (Base Year 2001=100) for the past 3 months -126.33)/126.33)*100

Where, AICPI stands for All-India Consumer Price Index.

From the year 1996, DA has been included to compensate for price rise or inflation in a particular financial year and hence it is revised twice every year, once in January and then in July.

Types of Dearness Allowance

1. Industrial Dearness Allowance

Industrial dearness allowance or IDA is the allowance applicable to employees of the public sector enterprises. Recently, the government of the India has increased IDA by 5% for this sector. This decision is set to benefit all board level executives, officers and employees of central PSUs.

IDA for government sector enterprises is revised quarterly based on the movement of the Consumer Price Index (CPI) in order to compensate for the rising inflation in the country.

2. Variable Dearness Allowance

VAD or Variable dearness allowance is the allowance that comes as a result of revision every six months for central government employees. The changed new figure that is received as a result of taking into consideration the increase or decrease in the Consumer Price Index, CPI, is termed as Variable dearness allowance. Based on this figure, the DA of employees is revised and rolled out.

There are three components that make up VAD. First is the consumer price index, second, the base index and third is the variable DA amount fixed by the government of India. The third component remains fixed until the government revises the minimum wages. Same way, base index also remains fixed for a particular period. Only the CPI or Consumer Price Index changes every month and affects the overall value of the variable dearness allowance.

Dearness Allowance Merger

Since the year 2006, the dearness allowance for employees from the public sector has been continuously growing. The figure currently stands at 50% of the basic salary. This has happened over a number of years during which the DA percentage rose steadily in order to hedge the rising inflation.

As a rule, it is practice to merge the DA with the basic salary once the DA percentage breaches the 50% mark. This is supposed to be a great salary booster for employees since all other components of the salary are calculated as a percentage of the basic salary. Demands for merging the DA with the basic salary have been with the government for quite some time. The union cabinet is expected to take a decision on this matter soon. In the meantime, employees from the public sector are ecstatic with anticipation of a merged DA which would mean a major hike in their salaries.

Dearness Allowance Hike as per New Developments Under the Budget 2020

What came as a huge relief to most central government employees was the hike in the Dearness Allowance. The Union Cabinet announced a raise of 2% in the DA of government employees recently. Spearheaded by Indian Prime Minister, Narendra Modi, this move is going to benefit more than 50 lakh Central Government employees and approximately 55 lakh pensioners. In order to lessen inflation effects on the salaries of these employees, the dearness allowance hike is usually offered to pensioners and staffers.

2018 witnessed a lot of changes in the realm of taxation. With the new budget, came a lot of new advancements and developments. For more than 11 million employees, the Dearness Allowance was increased to 7% from an earlier rate of 5%.

According to the proposed changes, this hike is most likely to work in the favor of more than 48.41 lakh central employees and 61.17 lakh pensioners and staffers.

Role of Pay commissions in modifying DA

Every subsequent pay commission in India is expected to revaluate the salary of employees of the public sector taking into account the various components of salary. Dearness Allowance too, is taken into account for rolling out the next pay commission report. Pay commissions take into account all the factors that feed into the calculation of salaries of personnel in the public sector. Reviewing and changing the multiplication factor also comes under the purview of the pay commissions.

Dearness Allowance for Pensioners

Every time a new salary structure is rolled out by a pay commission, the pension for retired employees of the public sector is also revised. Same is the case with Dearness Allowance; every time DA is increased by a certain percentage, the same change gets reflected in the pensions of retired public sector employees. This applies to both regular pension as well as family pension.

Difference Between DA and HRA?

DA or dearness allowance is calculated as a specific percentage of the basic salary which is then added to the basic salary along with other components like HRA (House Rent Allowance) to make up the total salary of an employee of the government sector.

HRA or House Rent Allowance is the salary component given by an employer to an employee in order to meet expenses related to the renting of accommodation which the employee takes for residential purposes. HRA is applicable to both employees from the private sector as well as the public sector whereas DA is majorly applicable to employees working in the public sector.

FAQs about Dearness Allowance(DA)

  1. Is Dearness Allowance applicable to the employees and pensioners of private sector?
  2. No, the private sector employees in India are not entitled to receive Dearness Allowance as a part of their salary. It is applicable only to the public sector employees and pensioners.

  3. Does Dearness Allowance differ on the basis of work location of an employee?
  4. Yes, D.A. differs for the employees depending on their work location. Since D.A. is directly connected to the cost of living, it is not the same for all employees and varies for employees working in rural, urban, and semi-urban areas.

  5. Which rule grants Dearness Allowance to pensioners and the family pensioners?
  6. The Pension Rule 50.A. grants public sector pensioners and family pensioners D.A. in order to compensate for inflation or price rise.

  7. When is Dearness Allowance (D.A.) revised for employees?
  8. DA is reviewed biannually, once in every 6 months, on the basis of the cost of living index.

  9. When is Dearness Allowance merged with the basic salary of an employee?
  10. D.A. is merged with the basic salary of an employee when it exceeds the limit of 50%. This merging results in a significant hike in the salary of the employees. Currently, D.A. stands at 50%?of the basic salary of an employee.

  11. Does an employee need to pay tax for Dearness Allowance?
  12. Yes, a salaried employee has to pay tax for Dearness Allowance since it is taxable for employees having a regular salary according to the latest tax updates. Also, under the Income Tax Act, 1961, it is mandatory to declare one’s tax liability for D.A. during Income Tax Return (ITR) filing.

    However, if a salaried employee is provided with an unfurnished accommodation which is rent-free, after the fulfilment of all the pre-requisites, D.A. turns into that part of the salary which forms a component of retirement benefit salary.

  13. When does the pension revision for public sector employees take place?
  14. Pension revision for the retired employees of the public sector is done whenever a Pay Commission proposes a new salary structure. Similarly, whenever the D.A. is revised by a certain percentage, the pension of the retired employees undergoes revision accordingly.

  15. How is Dearness Allowance or D.A. computed on pension?
  16. Pensioner’s Dearness Allowance is computed on the basic pension of an employee without commutation. This means, an employee receives a specific percentage of his/her original pension as D.A.

  17. Do pensioners have the eligibility to draw Dearness Allowance during reemployment?
  18. Pensioners who are reemployed under the State government, Central government, an Autonomous or local body, or government undertakings, don’t have the eligibility to draw Dearness Allowance in cases where D.A. is granted along with fixed pay or time scale. Except for this, in all other cases of reemployment, D.A. is granted to a re-employed pensioner depending on the limit of the last drawn emoluments.

  19. Is Dearness Allowance granted to pensioners who stay abroad?
  20. D.A. is not granted to pensioners while they are staying in any place outside India during reemployment. Pensioners who are staying abroad without reemployment are allowed to receive D.A. on pension.

News About Dearness Allowance

  • Haryana CM freezes Dearness Allowance and Dearness relief until July 2021

    Due to the novel pandemic COVID-19, the Chief Minister of Haryana, Manohar Lal Khattar and the government of Haryana took a call to freeze the Dearness Allowance of the employees and the Dearness Relief for the pensioners till July 2021, according to an official statement put out by the Haryana Finance Department.

    The state government also announced that the additional instalments of the Dearness Allowance and Dearness Relief which was due from 1 July 2020 and 1 January 2021 will not be paid. The state government will, however, continue to pay the DA and DR at the rate of 17%, but the employees and pensioners will not receive the arrears was due from July 1, 2020 and January 1, 2021.

    According to the statement, when the government takes a decision to release the future instalments of the Dearness Allowance and the Dearness Relief which is due from 1 July 2021, the rates of the DA and the DR will be restored and will be subsumed in its cumulative revised rate which will be effective from 1 July 2021. The arrears from the period of January 1, 2020 till June 30, 2021 will not be paid.

    The Central government has also frozen the hike in inflation-linked allowance. In addition to this, the freezing of DA and DR till July 2021 will help the Centre around Rs.37,500 crore and the state Rs.82,500 crore and this amount will be used in helping the government tackle COVID-19 in the state as a stimulus package.

  • Odisha government announces an increase in DA for employees

    The Chief Minister of Odisha announced on 14 February 2020 a 5% increase in Dearness Allowance (DA) for government employees. According to the Chief Minister, the hike would be effective from 1 January 2020. According to various sources, the increase in DA will benefit around 3.5 lakh employees. The Odisha government also announced that the 10% arrears that are pending due to the recommendations of the 7th Pay Commission will be cleared. Therefore, 10% of the employee’s salary will be provided under the Odisha Revised Scales of Pay Rules for the financial year 2019-2020. According to various sources, 40% of the arrear amount between 1 January 2016 and 31 August 2017 was disbursed during the financial year 2017-2018.

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