Dearness Allowance

The rising cost of living is a concern for most of us. To compensate for the rising costs, employers provide a regular salary hike to their employees. It is the Central government employers who compensate their employees for the change in the cost of living by paying Dearness Allowance (DA). DA is calculated as a proportion of the basic salary. The government employees are also entitled to several allowances, which are calculated on DA and the basic salary.

  • Dearness allowance (formerly known as ‘Dear Food Allowance’), is like an additional income stimulus for lakhs of employees and pensioners.
  • As cost of living differs from a state and city to another, the DA is based on the location (urban, semi-urban, or rural) where the employee serves. As job transfer is common for government employees, DA helps to hedge the inflation cost of living.
  • Since the inflation rate faces ups and downs with time, the DA is raised or adjusted is frequently revised over a particular time period. The revision in DA is announced by the Central Government as per the salary structure report prepared by the Pay Commission.

Role of Pay Commissions in Revaluating Dearness Allowance

The Pay Commission in India evaluates and brings changes in salaries of public sector employees according to various components, which make up an employee’s final salary.

  • As DA is part of gross monthly salary, this allowance is also considered in preparing Pay Commission Report.
  • Every factor that is necessary to calculate the salary is taken into account by the Pay Commission.
  • This also includes timely review and update of factors responsible to calculate the DA.

Importance of Dearness Allowance

DA by the Centre has helped more than 65 lakh pensioners and 50 lakhs government employees till date. The pensioners have a lot to gain as well because every time DA is hiked, the monthly pension also increases proportionately. Thus, an increase in Dearness Allowance substantially increases the monthly income for the employees of the government and government-owned organizations.

Increase in Dearness Allowance

Dearness Allowance is a portion of the basic salary of employees and pensioners. The DA component can be updated by the Government of India when required to help the public sector employees cope with increasing prices.

  • In the Government Budget announcement of 2018, DA was hiked by 2%. DA was thus increased from 5% to 7%.
  • Later this allowance was hiked from 7% to 9%. The DA from January 1, 2019 reflected this hike
  • In October 2019, the government increased the DA by 4% (from 17% to 21% of the basic salary) effective from January 2020.
  • The current changes in the DA are effective from January 1, 2020. It means that you will receive a lump-sum amount for arrears of January and February, 2020.

Dearness Allowance for Pensioners

Just as the pension of the public sector employees is revised whenever a new salary structure takes shape, similarly with an increase in the DA, the pension for the retired public sector employees also increases.. This applies to both family and regular pension. Pensioner’s Dearness Allowance is calculated on his/her basic pension without commutation. Thus, the pensioner receives a specific percentage of the original pension as the DA.

  • In case of reemployment, pensioners do not have the eligibility to draw DA when it is granted on a fixed pay or time scale.
  • In other cases of reemployment, Dearness allowance is offered to all the reemployed pensioners as per the limit of the last drawn emoluments.
  • Dearness Allowance is not provided to pensioners when they stay abroad during reemployment. But, pension holders who stay outside India without reemployment are eligible for DA on their pension.

Announcement of Changes in the Dearness Allowance

As understood, every government employee receives DA, which is calculated as a proportion of the person’s basic salary. This allowance is increased every 6 months. The change in DA comes into effect from January 1 for the period of January to June, and July 1 for period between June and December.

  • It is important to note that Dearness Allowance calculation is based on AICPI (All-India Consumer Price Index) of the last 12 months.
  • The announcement for an increase in Dearness Allowance and payout for January to June is usually done in March and for the period July to December, done in September.
  • Also, the DA portion of pension or salary is often merged with the basic salary after it goes over a certain threshold. DA is merged with basic salary if it crosses the level of 50%.
  • Thus, the DA in such a case is calculated at a higher proportion of the pension or basic amount.

Tax Implication on Dearness Allowance

DA is fully taxable for salaried employees of public sector undertaking, under the Income Tax Act, 1961. If the person is provided with a rent-free unfurnished accommodation, then DA becomes a salary component, which forms the employee’s retirement benefit salary, given all the pre-conditions are fulfilled. DA component has to be mentioned separately when filing the IT return.

Differences between DA and HRA

Below-given are the common difference between Dearness Allowance and House Rent Allowance:

  • Dearness allowance is calculated on specific percentage of a person’s basic salary.
  • It is then added to basic salary with components such as House Rent Allowance (HRA) to make up for the total salary of employees in the government sector.
  • House Rent Allowance (HRA) is a component in the salary of an employee to meet the expenses for renting of accommodation for residential purpose.
  • HRA is for employees of both public and private sector, whereas Dearness allowance is specifically for employees of the public sector.

Types of Dearness Allowances

DA is divided into two categories for calculation:

  1. Industrial Dearness Allowance
  2. Industrial dearness allowance or IDA is applicable to employees of the public sector enterprises. The IDA is revised to benefit board employees, officers, and executives of the central PSUs (Public sector employees). In order to compensate for the rising inflation rate IDA is revised quarterly based on the movement of the Consumer Price Index (CPI).

  3. Variable Dearness Allowance
  4. VAD or Variable dearness allowance is for Central Government Employees and is revised every six months. This is based on the increase or decrease in the following:

    • Base Index– It remains fixed for the particular period.
    • Consumer Price Index– Influences VDA as it changes each month.
    • VDA Amount as Fixed by the Government – It remains fixed until the government decides to revise the basic minimum wages

Dearness Allowance Calculation

As per 2006, the dearness allowance calculation follows the below mentioned formula:

  1. For Central Government employees:
  2. Dearness Allowance % = ((Average of AICPI which is All India Consumer Price Index (Base Year 2001=100) for the past 12 months -115.76)/115.76)*100

  3. For Central public sector employees:
  4. Dearness Allowance % = ((Average of AICPI which is All India Consumer Price Index (Base Year 2001=100) for the past 3 months -126.33)/126.33)*100