Dearness Allowance- What is DA and How to Calculate it?

Employees of public sector receive basic salaries as per their pay scale. Upon the basic salary, several other components are calculated and added to make for the take-home amount. One of the components of the salary for a public sector employee is the Dearness Allowance or DA. The Dearness allowance meaning is a fixed percentage of the person’s basic salary that is added to the basic pay to calculate the gross salary.

The Government of India pays DA to all public sector employees, and pensioners towards "cost of living adjustments". Dearness Allowance in India was launched with the intention to hedge the impact of inflation. As the impact of the inflation differs from a location to another, the dearness allowance calculator takes into account the location an employee is employed at. It is based on the salaried individual’s presence in semi-urban sector, rural sector to the urban sector.

Dearness Allowance 2019 Update

The DA component can be updated by the GOI when required to help the public sector employees cope with increasing prices. Recently, the central government hiked DA by 3% to 12% to benefit lakhs of central staff and pensioners. The previous hike in DA was done in August 2018, where it was increased from 7% to 9%. The DA from January 1, 2019 will reflect this hike. Thus, employees will also receive arrears for the January month.

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 retirement benefit salary, given all the pre-conditions is fulfilled.

How to Calculate Dearness Allowance?

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:

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

What is the 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. This is why DA 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. It also includes timely reviewing and updating the multiplication factor to calculate DA.

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 has recently been increased by 5% 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).

  3. Variable Dearness Allowance

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 for Pensioners

Just as the pension of the public sector employees is revised whenever a new salary structure takes shape, similarly Dearness allowance when increased, the pension for the retired public sector employees is also increased. This applies to both family and regular pension.

What are the Differences between DA and HRA?

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 the complete 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. This allowance is for employees of both public and private sector, whereas Dearness allowance is specifically for employees of the public sector.

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