Dearness Allowance (DA) With Example

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India has been experimenting with numerous measures to curb the rising inflation due to which the price of almost all commodities have increased. Most severely hit commodity is food and this has a direct impact on the economy. Considering the fact that inflation is due to market movement, the government can take measures only to a certain extent, to curb it. But since it has an impact on citizens’ everyday lives and needed to be shielded from the negative effect of rising prices, Dearness allowance or DA becomes a key player with an important role to play.

Page Contents

What is Dearness Allowance?
How to Calculate Dearness Allowance?
What is Industrial Dearness Allowance?
Variable Dearness Allowance
Dearness Allowance Merger
Role of Pay commissions in modifying DA
Dearness Allowance for Pensioners
Difference Between DA and HRA
News About Dearness Allowance

Salary paid by employers to their employees in the public sector is divided into various components. One of these is the Dearness Allowance. The concept of Dearness Allowance or DA was introduced after World War II and was initially known as ‘Dear Food Allowance’. In the beginning, Dearness Allowance was provided by the government to employees due to a demand for wage revision. However, it was later linked to the Consumer Price Index. A number of committees in the Central Government have been revising and restructuring the percentage of Dearness Allowance.

In a country like India, Payment of DA becomes even more significant owing to the subdivision of various Indian states into cities, towns and villages. The DA component takes care of the change in the cost of living depending upon the location of the employee. Specially, for government sector employees, job transfers are an essential feature and hence DA becomes even more significant in order to hedge the inflation cost of living difference as well as inflation.

What is Dearness Allowance?

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.

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Dearness Allowance under Income Tax and Exemption Limit Chart

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.

What is 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.

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.

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.

Allowances & Differences

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News About Dearness Allowance

Additional 2% Dearness Allowance cleared by the Government

The Union Cabinet that is chaired by Prime Minister Narendra Modi has approved the release of an additional installment of Dearness Allowance to employees of the Central Government and Dearness Relief to pensioners. The increase has been 2% over the existing rate of 2% of the Pension/Basic Pay in order to compensate for increase in price.

It has also been said that this rise is as per the accepted formula is based on the 7th Central Pay Commission’s recommendation. The government also said that the impact of this rise in Dearness Allowance and Dearness Relief will be Rs.5,857.28 crore every year and Rs.6,833.50 crore in the financial year of 2017 to 2018.

22nd March 2017
Centre increased dearness allowance by 2%

The cabinet last week increased dearness allowance to 4% from the currently existing 2% to address concerns put forth by central government employees.

This new move will be counted as operational from January 2017 and will benefit over 1 crore individuals which include 48.85 lakh employees and 55.51 lakh pensioners.

An official statement regarding the issue suggested that the additional dearness allowance was cleared by the Union Cabinet which was chaired by Prime Minister Narendra Modi. It also said that this increase will bring about relief to over a crore people, including pensioners and employees.

However, not everyone was happy with the rise. One concerned body called the Confederation of Central Government Employees said that the 2% increase doesn’t change anything when compared to the actual cost of living index.

The CCGE was of the impression that inflation is way too high to be handled by just a 2% increase in dearness allowance. It also said that allowances must be increased further more to keep in line with the actual inflation figures in the country.

21st March 2017
Dearness Allowance Hiked by 7% in Odisha

News coming in from Odisha on the 17th of December is that the government has decided to hike dearness allowance or DA of all its current employees and the dearness relief received by the pensioners by 7% with effect from the month of July, 2016 in retrospective. The hike was declared by Naveen Patnaik, the chief minister of Odisha, at the Bhubaneswar state secretariat.

The hike is set to benefit almost 4 lakh present employees and 3 lakh pensioners. The decision will increase the government expense by Rs.540 crore for 8 months. The added burden on the exchequer will be Rs.810 crore p.a. The hike has increased the Dearness Allowance for Odisha government employees from the earlier 125% to 132% now.

17th December 2016
Arun Jaitley's Foreign Trips Cause Delay in Dearness Allowance Hikes
For those central government employees who were rejoicing at the upcoming hike in dearness allowance will have to postpone their celebrations. The finance minister's busy schedule in the upcoming weeks has led to the postponement of the hike. The hike of close to 2% in the dearness allowance will be further postponed by at least 7 to 10 days due to the packed travel itinerary of the minister. This includes a three day visit to Canada where the minister is currently present followed by a seven day visit to the United States of America. This means that the nod by the Union Cabinet for the hike won't take place before 10th October 2016.

4th October 2016
Move to hike Dearness allowance to be approved by Dussehra
Acche Din has finally arrived for more than 10 Million Central Government employees. The Modi government is on the verge of approving an increase in the dearness allowance by 2% just in time for the coming Dussehra festival. The hike is likely to take place as per accepted calculation under the 7th Pay Allowance commission recommendation and will be moved by the Finance Minister, Arun Jaitley. The average rate of CPI-IW or Consumer price Index-industrial labour from July 2015 to June 2016 was close to 2.90% and using the calculation recommended by the 7th pay commission, the hike will be 2%.

3rd October 2016
No Dearness Allowance for Foreign Citizens Who worked Under the Punjab State Government
The state government in punjab has come to the decision to halt paying dearness allowance (DA) and also reimbursing all the medical expenses of their retired employees who are currently citizens of foreign nations. The retirees would continue to get the basic pension or the family pension, but without the DA.

Currently 125% DA is paid by the Government on the basic salary to the employees.

The finance department notified officials from all the departments as well as commissioners both who are divisional and deputy and even the registrar of Punjab as well as the Haryana high court, on September 16 to stop DA payments to former employees with citizenship abroad.

21st September 2016
Telangana Expected To Make A Loss of 100 Crore Over Dearness Allowance Hike
The state government of Telangana on Thursday raised employees' dearness allowance by 3.144% of the basic pay on last week. This hike will be evaluated and calculated from January 1, 2016. Hence the dearness allowance has been increased to 18.34% from 15.196%. It is expected to benefit over 3.5 lakh ployees across the state. However, this also means 100 crore cost to the State Government every month for this statement.
Despite that employees are relieved considering that they will gain benefits from the hike and it has come after an eight month of delay from when it was actually supposed to be effective.
7th September 2016
Pay Commission Arrears to be Disbursed With August Salary for Government Employees
All eligible employees of the central government will receive arrears from the 7th Pay Commission implementation as a lump sum amount along with the salary for August. Over 1 crore employees working with various departments and agencies will receive the monetary benefit (inclusive of the Dearness Allowance hike) which became effective from January 1 this year.
To speed up the disbursal process, the arrears may be paid without pre-check of the pay fixation. As per the recommendation made by the Pay Commission, the minimum salary for a central government employee will now be Rs.18,000 per month. It must be noted that the base scale before the implementation was Rs.7,000. Employees would get a 2.57 time hike in the basic salary as per the recommendations made.
9th August 2016
State Government Employees in Tripura to Get an Additional 4% DA
In a move set to benefit over 209,000 state government employees and pensioners, the Tripura Government has declared an addition 4% Dearness Allowance. This announcement was made on July 14, 2016 as a measure to bring the pay on par with the central government scale. It must be noted that a section employees working with Tripura Government had expressed their displeasure in the wake of recent recommendations made by the 7th Pay Commission.
This would result in an additional burden of Rs.134.40 crore on the state exchequer. The DA increase is applicable for fixed pay, part time and contingent workers. In must be noted that the state's current financial situation is in a serious crunch.
20th July 2016
Tripura High Court Directs State To Pay 31% DA To Employees
In a bid to ensure that parity was given between central and state government employees, the Tripura high court on Friday instructed the Manik government to pay 31 per cent dearness allowance (DA) to all state government employees in the form of three installments spread out over six months. Shishrendra Saha, Secretary general of Tripura Government Employees Federation, filed a petition that highlighted the difference in the payment of DA to state government employees and central government employees. The petition was approved by Justice Subhashis Talapatra, who directed that the first instalment of the balance is to be paid in the next month. Saha stated that while all state government employees have the right to be paid the same DA amount as central government employees, the government of Tripura had failed to make provisions to bring parity between the two from January 2009 to August 2011. He also stated that unlike other states, who followed the norms diligently, the Tripura government had actually released an additional 7 per cent DA to its employees, widening the difference to 31 per cent.
29th June 2016