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Dearness Allowance (DA) – Meaning, Types, Calculation etc

Updated on: 10 Aug, 2023 03:40 PM

Money has become as important as natural resources to survive in this world. Prices of almost everything are touching the sky and it is making survival of a common man extremely difficult. Food is the most basic commodity for survival and the prices of the same fluctuate the most. It directly affects the economy and lifestyle of the common man. Since inflation occurs due to market forces, the government tries to stabilise the prices by introducing several tools. Amongst the tools introduced by the government, Dearness allowance is one of them.

The concept of dearness allowance was introduced after World War II. It was known as Dear Food Allowance during the early days of its inception. It was provided by the government to compensate for the request of wage revision by the employees. With time, it was linked to the Consumer Price Index .

With Dearness Allowance, it becomes easy for the government employees to relocate to a new place due to a job transfer. This allowance helps them in settling in and with household expenses which makes it easy for them to survive the inflating prices.

What is the Dearness Allowance?

Being a government employee comes with the added benefits and Dearness Allowance is one of them. The amount that the government pays to its employees under the umbrella of cost of living is called Dearness Allowance. Public sector employees and pensioners are entitled to this allowance. Like India, even Bangladesh follows the system of considering Dearness Allowance as a component of salary.

An employee's salary is made of several components like HRA (House rent allowance), contributions to the provident fund, Dearness Allowance, and several others. Dearness Allowance makes up for a certain fixed percentage as part of the basic salary. The major objective of Dearness Allowance is to dilute the effect of inflation on the lives of its employees. It is important to note that Dearness Allowance varies from person to person as it is directly dependant on the cost of living and location. Due to this, the Dearness Allowance extended to employees in urban, semi-urban, and rural area differs. The dearness allowance extended to central government employees and central public sector employees also differs.

Dearness Allowance is constantly revised to help people with the inflated prices and with this maintaining a healthy lifestyle. This allowance has been effective to only a certain extent since inflation rates are determined by the market and the market keeps changing.

What are the different types of Dearness Allowance?

Dearness Allowance is divided into two categories for the sake of calculations. Let's take a look at these separate categories.

  • Industrial Dearness Allowance: Employees of a Public sector undertaking are entitled to this type of allowance. Industrial Dearness Allowance (IDA) is updated every quarter of the financial year and the revised rates of the IDA are determined by taking into consideration the Consumer Price Index. Revision becomes a necessity as inflation rate keeps fluctuating.
  • Variable Dearness Allowance: Only central government employees are entitled to variable dearness allowance. This allowance is revised twice a year, i.e, in January and in July. This allowance is termed as variable because it is revised taking into consideration the increase/decrease in the consumer price index (CPI).
    VDA or the Variable Dearness Allowance constitutes various components. Look at the chart below to study the various components of VDA.
  • Consumer Price Index: CPI or Consumer Price Index is the only component amongst three that changes on a monthly basis and these changes result in the increase/decrease of the variable dearness allowance.
  • Base Index: this component of the VAD remains constant for a fixed period of time.
  • Variable DA allowance: the government has the responsibility of setting and revising the minimum wages amount. Until the revision happens, Variable DA allowance stays the same.
  • Dearness Allowance and Income Tax exemptions: Dearness Allowance extended to salaried employees is 100% taxable. If the employee is provided with an unfurnished accommodation free of cost, then DA becomes the part of retirement benefit salary which is a component of salary if all the conditions set forth are fulfilled. According to the Income Tax Act 1961, declaration of dearness allowance in the income tax returns was made mandatory.

How is dearness allowance calculated?

The government introduced the Dearness Allowance component in the salary structure post World War II. The method to calculate dearness allowance was changed in 2006 and since then this method has been used.

Two different methods are used to calculate DA for central government employees and for the central public sector employees. Let's look at methods separately.

For Central Government Employees:
The dearness allowance is calculated by the following method:

((Average of All-India Consumer Price Index (with the base year 2001 = 100) for the past 12 months – 115.76) / 115.76) * 100

For Central Public Sector Employees:
The following method is used to calculate the dearness allowance for Central Public sector employees:

((Average of All-India Consumer Price Index (with the base year 2001 = 100) for the past 3 months – 126.33) / 126.33) * 100

The merger of DA with basic salary:
The percentage of Dearness allowance for the central employees has been rising since 2006. Currently, the dearness allowance makes up 50% of the basic salary. A constant rise in dearness allowance can be registered due to rising inflation over a period of time.
According to rules and regulations, if the percentage of dearness allowance crosses the 50% mark, then it mandatorily needs to be merged with the basic salary. This merger is expected to boost the salary of the employees. This is because all the other components of the salary are calculated as the percentage of basic salary. It's been a while since the government received the request of merging dearness allowance with the basic salary. Union government's decision on the matter is still pending on the request.

Pay Commission and the Dearness Allowance:
Re-evaluation of the salaries of the employees of the public sector falls with the pay commission. The salaries are re-evaluated by taking into consideration all the components of the salary. Even Dearness Allowance is taken into re-evaluation before releasing the pay commission report which contains a detailed analysis of the salary and its various components. Factors which contribute to the calculation of salaries for the central government employees are studied in detail. The pay commission is also responsible for reviewing the changes made to the multiplication factor used for calculating the DA.

Dearness Allowance for the Pensioners:
Public sector retired employees are also benefited every time the pay commission rolls out a new salary structure. With every new salary structure released for the public sector employees, the pension for the retired employees is also revised. If the dearness allowances are increased, then parallelly, the same changes are incorporated in the pensions of the public sector retired employees. The pension of the retired public sector employees is inclusive of both regular pension and family pension and the changes are reflected in both the pensions.

How is HRA different from DA?

Dearness allowance like HRA (House-rent allowance) is a component of salary which is calculated as a certain percentage of basic salary and then added to the basic salary. All the components of the salary together make the total salary which every employee is entitled to.

HRA is a house-rent allowance is a salary component. This allowance is granted by the employer to its employee to help him/her with expenses attached to renting accommodation for living purposes. Employees of both public sector and private sector are eligible for this allowance from the employer.

Current rates and trends:
The central government recently announced a bonanza for the public sector employees. Additionally to the 9% rate of dearness allowance for the government employees, the government announced a 3% hike in the dearness allowance. This additional benefit was effective with the start of this year, i.e, 1st January 2019. With this additional hike, the government is likely to come down by Rs. 9,200 crores. It is expected that more than one crore central government employees and pensioners will be benefited with this hike. More specifically, it will benefit around 62.03 lakhs pensioners and about 48.41 lakh employees of the central government. This hike was implemented according to the suggestions made by the Pay Commission in their report.

Frequently Asked Questions

Q- Can private sector employees claim dearness allowance?

No, the dearness allowance is specifically for the public sector employees. Employees under the private sector are not eligible to claim this allowance.

Q- Which rule sanctions the dearness allowance to the pensioners?

As per section 50.A. of the pension rule, dearness allowance is extended to the pensioners to help them with the increased prices.

Q- Can pensioners staying abroad claim dearness allowance?

Pensioners who are re-employed outside India are not eligible to receive dearness allowance while staying abroad. Pensioners living abroad without taking up employment are eligible to receive dearness allowance on pension.

Q- What is the purpose of extending dearness allowance?

Dearness allowance is extended to public sector employees can deal with market-based inflation without compromising on the quality of life. In other term, it is the cost of living adjustment. It is revised on a regular basis so as to compensate for changes in the consumer price index.

Q- What is the Consumer Price Index?

It is an instrument which is used to measure which records the changes in the price of consumer goods and services bought by the households.

CA Abhishek Soni
CA Abhishek Soni

Abhishek Soni is a Chartered Accountant by profession & entrepreneur by passion. He is the co-founder & CEO of Tax2win is amongst the top 25 emerging startups of Asia and authorized ERI by the Income Tax Department. In the past, he worked in EY and comes with wide industry experience from telecom, retail to manufacturing to entertainment where he has handled various national and international assignments.