Dearness Allowance (DA): Meaning, Types & Calculation

The Dearness Allowance is an additional component of the salary provided to public sector employees and pensioners by the government. It is designed to assist them in managing the escalating cost of living resulting from inflation by providing an amount above and beyond their basic salary. Typically, this is a fixed percentage of the basic salary that is periodically adjusted in accordance with prevailing conditions. The amount of DA offered varies from one employee to another based on their location since it is pegged to the cost of living in their area.It is essential to note that while the government of India, Bangladesh, and Pakistan employ the concept of Dearness Allowance to aid employees with the rising cost of living, it is not mandatory by any law for private companies to provide this benefit. Although some private companies do offer an additional amount for the same purpose, it is usually given under a different name and is not mandated by any law.

As discussed earlier, Dearness Allowance is a fixed percentage on the basic salary of the employee. And this rate is not unified for all employees. It varies from sector to sector as well as it is based on the location of the employee. The rate of DA is subject to change twice a year (usually in January & in July). The last hike was announced in September 2022 when the government increased the DA of its employees by 4%. This was made effective from July 2022. Now let’s look at how the DA rate is calculated and arrived at. Also Read : Dissecting the Structure of Your Salary

Dearness allowance or previously known as, ‘Dear Food Allowance’ was introduced in India after the Second World War. In 2006, some changes were made in the calculation of DA, and it is currently calculated as a certain fixed percentage of the basic salary. For example, if the basic salary of a government employee is Rs. 30,000 and the DA rate is 38%, the amount as the DA of the employee would be Rs. 11,400. The rate of DA is calculated as:

• Rate of DA for Central Government Employees (in %) = [ (Average of AICPI (Base Year of 2001 = 100) for the last 12 months – 115.76) / 115.76 ] x100
• Rate of DA for Central Public Sector Employees (in %) = [ (Average of AICPI (Base Year of 2001 = 100) for the last 3 months – 126.33) / 126.33] x100

Note: AICPI stands for All India Consumer Price Index, and the base year is 2001. The rate of DA is determined by taking the average of the AICPI for the specified period and then applying the appropriate calculation.Now you know how the rate of DA is arrived at, but do you know who decides and handles all the matters of Dearness Allowance?

The Pay Commission of India was set up by the Government of India to assess and to give its recommendation regarding the salaries of the government employees. It was set up in 1947 and since then, seven pay commissions have been set up and has helped more than 50 lakh government employees and over 60 lakh pensioners with their DA.The core responsibility of the pay commission is to assess and evaluate each component involved in the calculation of the salary of a government employee. This means that DA is also considered by the Pay Commission while preparing the next Pay Commission Report. The Pay Commission also assesses and calculates the multiplication factor used for the calculation of the rate of DA.

There are two types of Dearness Allowances that are offered by the government. Let’s take a look at both of them.

1) Variable Dearness Allowance (VDA)

Variable Dearness Allowance is a type of DA that is paid to the employee of the Central government. The rate of VDA revises every 6 months according to the change in Consumer Price Index. VDA in itself is based on three components which are base index, variable DA, and CPI.Basic index is a component that remains fixed for a longer time period. The variable DA also remains fixed until the government revises the basis minimum wage and the last component, the CPI or Consumer Price Index keeps changing every month and hence impacts VDA the most.

2) Industrial Dearness Allowance (IDA)

Industrial Dearness Allowance or IDA is a type of DA that is paid to the Public Sector employees of the Central government. The IDA Is revised every 3 months based on the changes in the Consumer Price Index to help the employees from rising cost of living.

As per the Income Tax Act 1961 , Dearness Allowance is fully taxable in the hands of salaried employees. There are no exemptions given on the amount of DA. If all the requirements are satisfied and the employee is given rent-free and unfurnished accommodation, then the full amount becomes a part of the salary to the extent that it is included in the retirement benefit salary of the employee. As per the provisions in the Income Tax Act, Dearness Allowance should be shown separately in the Income Tax Return of the taxpayer.

Dearness Allowance (DA) and House Rent Allowance (HRA) are distinct components of an employee's salary structure and should not be conflated. The following table outlines the differences between DA and HRA:

Pensioners are individuals who have retired from their government jobs and are entitled to receive either an individual or a family pension from the government. Whenever a new salary structure is implemented by the Pay Commission, the pension of the retired employee is also adjusted accordingly. However, if a pensioner is re-employed, they may not receive DA (dearness allowance) if it has been granted based on a fixed scale or time scale. This means that the re-employed pensioner's salary will not increase with inflation, which could impact their financial situation. Therefore, pensioners who are re-employed should be aware of the impact on their income and plan their finances accordingly. Frequently Asked Questions

1. Is Dearness Allowance paid to the employees of the private sector?

DA as a concept was brought by the government for their employees to help them curb inflation. Private Sector employees are not entitled to receive DA as a part of their salary by law. So, if a private company wants to pay their employees, they can pay by their choice.

2. Are there any exemptions or deductions that I can claim for Dearness Allowance?

No, there are no exemptions or deductions that are available for Dearness Allowance, and it is fully taxable in the hands of the employee.

3. What is the rate of DA reaches 100% of the Basic Salary of an employee?

Ever since the calculation of Dearness Allowance was changed, the rate of DA has seen a constant rise through the years. To keep a limit on this, a rule was created to merge the amount of DA with the amount of the basic salary when the DA rate crosses 50%. This means when this is merged, the basic salary of all employees would see a significant hike as there are certain components in the salary that are calculated at a certain % of the basic salary. And if the base increases, this amount will also increase. Hence this merging of DA with Basic Salary is often an event to celebrate for the employees.

4. Why is the rate of Dearness Allowance different for different employees?

Dearness Allowance is provided to the employee to help them tackle the rising cost of living due to inflation. The cost of living differs in rural, semi-urban and urban areas and therefore the rate of DA for employees living in different locations also differs.

5. When is the Dearness Allowance revised for the employees?

The Pay Commission reviews the rate of Dearness Allowance every six months based on the Consumer Price Index (CPI) and makes changes to the DA rate. Last review was in September 2022 and the change in the DA rate was made into effect from July 2022.

6. Is Dearness Allowance granted to the pensioners who stay abroad?

Dearness Allowance is granted to the pensioners who stay abroad and are not reemployed. But if a pensioner stays outside India during their reemployment, then the DA is not granted to them.Ready to make the most of your money? Start your tax planning journey now!

The information contained herein is generic in nature and is meant for educational purposes only. Nothing here is to be construed as an investment or financial or taxation advice nor to be considered as an invitation or solicitation or advertisement for any financial product. Readers are advised to exercise discretion and should seek independent professional advice prior to making any investment decision in relation to any financial product. Aditya Birla Capital Group is not liable for any decision arising out of the use of this information.