What Is Dearness Allowance?

5paisa Research Team Date: 15 May, 2023 10:28 AM IST

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Introduction

Dearness Allowance significantly affects an employee’s financial well-being in various industries. It is essential to understand its working and calculation. This blog delves deeper into the concept of Dearness Allowance and explores its significance and relevance in the current economic climate.
 

What is Dearness Allowance?

The Dearness Allowance is compensation for inflation-related increases in the prices of goods and services. It is a component of the salary paid in addition to the basic pay and other benefits. The purpose of Dearness Allowance is to ensure that the purchasing power of an employee's salary remains the same despite the increase in prices of essential commodities.

The Dearness Allowance is calculated as a percentage of the basic salary and varies based on the inflation rate and the consumer price index (CPI). It is revised periodically, usually once or twice a year, to adjust for changes in the inflation rate. The government of India and many private companies provide Dearness Allowance to their employees as a statutory requirement.
 

Current DA Rate

Dearness Allowance is a variable component of an employee's salary based on the cost of living. Its value differs from one public sector employee to another, depending on their location. Consequently, the DA allowance varies for rural, urban, and semi-urban workers.

DA rates are subject to biannual revision, with changes usually taking effect on January 1st for January to June and July 1st for the duration spanning from July to December.
 

Different Types of Dearness Allowance

Now that you know the dearness allowance meaning, let’s learn about its types.

1.    Variable Dearness Allowance (VDA) 

Variable dearness allowance (VAD) is an allowance provided to central government employees that undergoes revision every six months. This revision is based on the changes in the Consumer Price Index (CPI), resulting in a new figure determining the revised DA for the employees. 

VAD consists of three components: the CPI, the base index, and the variable DA amount fixed by the government of India. While the third component remains unchanged until the government increases the minimum wage, the base index also remains unchanged for a certain period. However, only the CPI changes every month, influencing the overall value of the VAD. 

2.    Industrial Dearness Allowance (IDA) 

Industrial dearness allowance (IDA) is a benefit provided to employees of public sector enterprises in India. Recently, the government increased the IDA for this industry by 5%, benefiting all board-level executives, staff members, and officers of central PSUs. 

The IDA for government sector enterprises is adjusted quarterly based on changes in the Consumer Price Index (CPI) to combat the impact of the country's rising inflation. The government's efforts to enhance IDA for public sector employees reflect its commitment to promoting economic growth and stability in the country.

Calculation of DA

In addition to House Rent Allowance (HRA), Conveyance Allowance, and other components, DA is added to the basic salary to form the total salary.

DA for Central Government Employees

DA% = [(Average of AICPI (Base Year 2001 = 100) for the last 12 months – 115.76)/115.76] x 100

DA for Public Sector Employee

DA% = [(Average of AICPI (Base Year 2001 = 100) for the last 3 months – 126.33)/126.33] x 100

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

DA for Pensioners

The revision of pensions for retired public-sector employees occurs when a pay commission introduces a new salary structure. Whenever there is an increase in DA, retired public sector employees receive a corresponding pension surge, including family and regular pensions.

Re-employed pensioners may not receive DA if granted on a fixed pay or time scale. In some cases, they may receive DA limited to their last drawn pay. However, pensioners residing in a foreign country during re-employment are not eligible for DA. However, pensioners living abroad without being re-employed can receive DA on their pension.
 

How is DA Treated Under Income Tax?

According to the Income Tax Act of 1961, salaried employees are subject to taxation. In cases where salaried employees receive rent-free housing from their employer, and all previously mentioned conditions are met, DA becomes a component of the salary, up to which it becomes a retirement benefit salary component.

As mandated by the Income Tax Act, individuals must declare their DA tax liabilities when filing their tax returns.
 

Difference between DA and HRA

Here is a table outlining the key differences between DA (Dearness Allowance) and HRA (House Rent Allowance).

Basis of Comparison

DA

HRA

Meaning

Additional component added to basic salary to counter inflation

Allowance provided to employees for expenses incurred on rented accommodation

Purpose

To help employees manage the rising cost of living due to inflation

To provide financial assistance to employees for renting a house

Calculation

Calculated as a percentage of the basic salary

Calculated based on the city of residence and the percentage of basic salary

Taxation

Fully-taxable

Partially taxable

Applicability

Applicable to all government employees and some private sector employees

Applicable to all employees who are renting a house

Variations

Varies based on the All India Consumer Price Index (AICPI)

Varies based on the city of residence and the percentage of basic salary

Dependency

Dependent on inflation rates

Dependent on the actual rent paid by the employee

 

Role of Pay Commissions in DA Calculation

Pay Commissions help calculate Dearness Allowance (DA) for central government employees. The government appoints these commissions to review and revise central government employees' salary structure and allowances. The DA is calculated based on the average All India Consumer Price Index (AICPI) for the last 12 months and is adjusted twice a year, effective from January 1st and July 1st. The Pay Commissions recommendations are crucial in determining the percentage of DA to be granted to employees, and the government implements these recommendations.

Dearness Allowance Merger

Over the past several years, there has been continuous growth in the dearness allowance for public sector employees, which currently stands at 50% of the basic salary. This increase in DA percentage has been necessary to offset the effects of rising inflation on employee salaries. 
Once the DA percentage crosses the 50% mark, it is generally merged with the basic salary. This merger is expected to provide a significant boost to employee salaries since all other components of the salary are calculated as a percentage of the basic salary.

Employee unions have requested to merge the DA with the basic salary of the government for some time now. While there has been no official announcement yet, the union cabinet is expected to make a decision soon. If the merger is approved, it will be a major benefit for public sector employees, resulting in a substantial salary hike. The anticipation among employees is palpable, and they eagerly await news on this matter.
 

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Frequently Asked Questions

Employees and pensioners in the public sector receive dearness allowances as a cost of living adjustment.

The government only provides dearness allowances to public sector employees.

Yes, the Dearness Allowance (DA) for government and public sector employees can differ based on the work location.

Dearness Relief on Pensions and Family Pensions against price rises is granted to Pensioners, including those drawing compassionate allowances under Rule 41 and Family Pensioners, subject to such rates and conditions as the Central Government may specify from time to time under Rule 52 of the CCS (Pension) Rules, 2021.

The DA is reviewed biannually, once every six months, depending on the cost of living index.

Dearness Allowance (DA) is merged with the basic salary of an employee when the DA percentage crosses a certain threshold. As per the recommendations of the 7th Central Pay Commission (CPC), DA should be merged with basic pay once it reaches 50% of the basic pay. 

Yes, an employee must pay tax on Dearness Allowance (DA) received as a part of their salary. DA is considered a taxable component of an employee's salary under the Income Tax Act, of 1961.

Per the government rules, pensioners residing abroad without re-employment are eligible for DA on their pension. However, if they are re-employed, they are not eligible for DA.

A pensioner's Dearness Allowance is calculated based on the basic pension they receive without commutation. Employees receive DA as a certain percentage of their original pension.

Suppose a pensioner is re-employed under the State government, Central government, an Autonomous or local body, or government undertakings. In that case, they may not be eligible for DA if it's granted along with fixed pay or time scale. However, if they are re-employed in the private sector or a different capacity, they may be eligible for DA depending on their last drawn emoluments limit.