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 on 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.
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.
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.
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.
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 is 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.
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.
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 is fulfilled. DA component has to be mentioned separately when filing the IT return.
Below-given are the common difference between Dearness Allowance and House Rent Allowance:
DA is divided into two categories for calculation:
Industrial dearness allowance or IDA is applicable to employees of the public sector enterprises. The IDA is revised to benefit every 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).
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:
As per 2006, the dearness allowance calculation follows the below mentioned formula:
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
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
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