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Dearness Allowance (DA) – Meaning, Types, Calculation

Updated on: 16 Jan, 2024 05:49 PM

Salary structure of any employee, in the private or public sector, comprises a basic fixed salary and a few allowances. The total basic pay and allowances make up the salary you take home. These allowances are given as an adjustment for the cost of rising inflation.

What is Dearness Allowance?

Dearness Allowance (DA) is a cash allowance paid to employees and pensioners by the government, aimed at hedging the impact of inflation. Similar to, HRA, contribution to provident fund, etc.
Dearness allowance is a percentage of the basic salary and is directly related to the cost of living. Despite the government’s efforts to limit inflation, partial success has been achieved because prices alter according to market conditions. Therefore, the IV Central Pay Commission recommended the grant of Dearness Allowance on a ‘percentage system’ of basic pay.
Furthermore, this percentage of Dearness Allowance is revised twice every year to curb the effect of inflated prices and lead a healthy lifestyle. This change is introduced on January 1st for the timeframe between January to June and July 1st for the period ranging from July to December.
Dearness Allowance was introduced in World War II and was initially known as ‘Dear Food Allowance.’ Dearness Allowance was originally provided to employees as the demand for wage revision was raised. Though later, it was linked to the Consumer Price Index. Consumer Price Index (CPI) is a metric to measure inflation that central and state governments utilize, also the Reserve Bank of India, to ensure money supply and price stability.
Dearness Allowance is different for different employees based on their location. DA also differs from central public undertaking employees and central government employees.


How to calculate Dearness Allowance?

  • Dearness Allowance calculation formula for Central Government employees
    {(Average of All India Consumer Price Index for last 12 months – 115.76)/115.76} × 100
    Also, to calculate Dearness Allowance for Central Public Sector employees, the formula is:-
  • Dearness allowance calculation formula for the employees of Central Public Sector companies
    {(Average of All India Consumer Price Index for last 3 months – 126.33)/ 126.33} × 100

What are the types of Dearness Allowance?

  • Industrial Dearness Allowance (IDA)
    Industrial Dearness Allowance is offered to public sector employees of the Central Government and is revised quarterly by the government. IDA is based on the consumer price index.
  • Variable Dearness Allowance (VDA)
    Variable Dearness Allowance is offered to the employees working under the Central Government. VDA is revised by the government on a half-year basis and based on the consumer price index. However, until the government increases or decreases the bare minimum wage, the Variable Dearness Allowance remains fixed.

Is Dearness Allowance given to Pensioners?

Every time the pay commission rolls out a new salary structure, the exact change is reflected in the pension of the retired employee. This applies to both family and regular pensions. However, if the pensioner is re-employed, the Dearness allowance cannot be granted to them on a fixed pay or time scale. Also, if the pensioner resents India during re-employment, they are not eligible for DA on their pension.


When is Dearness Allowance Merged with the basic salary?

Dearness Allowance has been increasing continuously since 2006 to hedge the rising inflation. Currently, it stands at 50% of the basic salary. As a rule, once the DA percentage crosses the threshold of the 50% mark, it will be merged with the basic salary as a practice. This merger can turn out to be a good salary hike for the employees.


How is Dearness Allowance Treated Under Income Tax?

Dearness Allowance is entirely taxable for salaried employees as per the latest update of the Income Tax Act, 1961. The Income Tax Act also makes sure that the tax liability of Dearness Allowance is declared in the field returns. Suppose the employees are provided with unfurnished rent-free accommodation by the company; then, in that case, the Dearness allowance is assessed as a part of the salary to the extent wherein it forms a part of the retirement benefit salary.


Current Dearness Allowance Hike

Every government employee is entitled to receive the Dearness Allowance as a portion of their basic salary. However, as mentioned earlier, there is a change in the Dearness Allowance percentage every six months.
Until the last update, the proposal to increase the Dearness Allowance (DA) for central government employees and pensioners was approved to 38 percent of the basic pay from 34 percent, up 4 percent, effective July 1st, 2022. This hike is based on the percentage increase in 12 monthly averages of the All India Consumer Price Index for the period ending June 2022. As a result, 4.8 million central government employees and 6.9 million pensioners will benefit from this hike.


Frequently Asked Questions

Q- Is Dearness Allowance applicable for private sector employees and pensioners?

No.


Q- Which pensioner rule allows Dearness Allowance to pensioners and family pensioners?

The Pension Rule 50A.


Q- In what time duration the Dearness Allowance is revised for the employees?

DA is reviewed bi-annually, i.e. once every six months.


Q- When is the Dearness Allowance merged with the basic salary?

DA is merged with the basic salary when it exceeds 50% of the limit.


Q- Is Dearness Allowance taxable?

Yes, according to the latest tax update, it is mandatory to declare tax liability for DA during ITR Filing.


Q- How is Dearness Allowance calculated?

This calculation differs for each sector, you have to multiply your basic salary with the dearness allowance rate of your sector.


Q- Is house rent a part of DA?

No, house rent is a part of the HRA component of the salary. DA and HRA both are components of an employee’s salary. They both are treated differently under the Income-tax Act 1961 rules.


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.in. 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.