Dearness Allowance can be 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.
Increase in Dearness Allowance, effective July 1 from 17% to 28%
The cabinet had approved of a 11% point increase in Dearness Allowance (DA) and Dearness Relief (DR) for employees of the central government and pensioners from 1 July. The DA rate is 28%, up from 17%.
What is Dearness Allowance?
Dearness Allowance is the 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 applies to both employees in India and Bangladesh.
Calculation of Dearness Allowance
After the Second World War, the 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
The Two separate categories to calculate Dearness Allowance are Industrial and Variable Dearness Allowance.
- Industrial Dearness Allowance
- Variable Dearness Allowance
Industrial dearness allowance or IDA is the allowance applicable to employees of public sector enterprises. Recently, the government of 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) to compensate for the rising inflation in the country.
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.
Three components 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, the 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.
How is DA Treated 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.
Role of Pay Commissions in DA Calculation
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 the salary. Dearness Allowance too is taken into account for rolling out the next pay commission report. Pay commissions to 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. The 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 pensions as well as a family pension.
Dearness Allowance Hike as per New Developments Under the Budget
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. 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.
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 to meet expenses related to the renting of accommodation which the employee takes for residential purposes. HRA applies 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.
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 several years during which the DA percentage rose steadily 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.
FAQ's on Dearness Allowance
- Is Dearness Allowance applicable to the employees and pensioners of private sector?
- Does Dearness Allowance differ on the basis of work location of an employee?
- Which rule grants Dearness Allowance to pensioners and the family pensioners?
- When is Dearness Allowance (DA) revised for employees?
- When is Dearness Allowance merged with the basic salary of an employee?
- Does an employee need to pay tax for Dearness Allowance?
- How is Dearness Allowance or DA computed on pension?
- Do pensioners have the eligibility to draw Dearness Allowance during reemployment?
- Is Dearness Allowance granted to pensioners who stay abroad?
No, the private sector employees in India are not entitled to receive Dearness Allowance as a part of their salary.
Yes, DA differs for the employees depending on their work location. Since DA 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.
The Pension Rule 50A grants public sector pensioners and family pensioners DA in order to compensate for inflation or price rise.
DA is reviewed biannually, once in every 6 months on the basis of the cost-of-living index.
DA 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, DA stands at 50% of the basic salary of an employee.
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 DA during Income Tax Return (ITR) filing.
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 DA.
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 DA is granted along with fixed pay or time scale. Except for this, in all other cases of reemployment, DA is granted to a re-employed pensioner depending on the limit of the last drawn emoluments.
DA 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 DA on pension.