What Is Dearness Allowance?

Introduction

Dearness Allowance significantly affects an employee’s financial well-being in various industries. It is essential to understand its working and calculation. This blog delves deeper into the concept of Dearness Allowance and explores its significance and relevance in the current economic climate.
 

What is Dearness Allowance?

The Dearness Allowance is compensation for inflation-related increases in the prices of goods and services. It is a component of the salary paid in addition to the basic pay and other benefits. The purpose of Dearness Allowance is to ensure that the purchasing power of an employee's salary remains the same despite the increase in prices of essential commodities.

The Dearness Allowance is calculated as a percentage of the basic salary and varies based on the inflation rate and the consumer price index (CPI). It is revised periodically, usually once or twice a year, to adjust for changes in the inflation rate. The government of India and many private companies provide Dearness Allowance to their employees as a statutory requirement.
 

Current DA Rate

Dearness Allowance is a variable component of an employee's salary based on the cost of living. Its value differs from one public sector employee to another, depending on their location. Consequently, the DA allowance varies for rural, urban, and semi-urban workers.

DA rates are subject to biannual revision, with changes usually taking effect on January 1st for January to June and July 1st for the duration spanning from July to December.
 

Different Types of Dearness Allowance

Now that you know the dearness allowance meaning, let’s learn about its types.

1.    Variable Dearness Allowance (VDA) 

Variable dearness allowance (VAD) is an allowance provided to central government employees that undergoes revision every six months. This revision is based on the changes in the Consumer Price Index (CPI), resulting in a new figure determining the revised DA for the employees. 

VAD consists of three components: the CPI, the base index, and the variable DA amount fixed by the government of India. While the third component remains unchanged until the government increases the minimum wage, the base index also remains unchanged for a certain period. However, only the CPI changes every month, influencing the overall value of the VAD. 

2.    Industrial Dearness Allowance (IDA) 

Industrial dearness allowance (IDA) is a benefit provided to employees of public sector enterprises in India. Recently, the government increased the IDA for this industry by 5%, benefiting all board-level executives, staff members, and officers of central PSUs. 

The IDA for government sector enterprises is adjusted quarterly based on changes in the Consumer Price Index (CPI) to combat the impact of the country's rising inflation. The government's efforts to enhance IDA for public sector employees reflect its commitment to promoting economic growth and stability in the country.

Calculation of DA

In addition to House Rent Allowance (HRA), Conveyance Allowance, and other components, DA is added to the basic salary to form the total salary.

DA for Central Government Employees

DA% = [(Average of AICPI (Base Year 2001 = 100) for the last 12 months – 115.76)/115.76] x 100

DA for Public Sector Employee

DA% = [(Average of AICPI (Base Year 2001 = 100) for the last 3 months – 126.33)/126.33] x 100

Here, AICPI stands for All-India Consumer Price Index.

DA for Pensioners

The revision of pensions for retired public-sector employees occurs when a pay commission introduces a new salary structure. Whenever there is an increase in DA, retired public sector employees receive a corresponding pension surge, including family and regular pensions.

Re-employed pensioners may not receive DA if granted on a fixed pay or time scale. In some cases, they may receive DA limited to their last drawn pay. However, pensioners residing in a foreign country during re-employment are not eligible for DA. However, pensioners living abroad without being re-employed can receive DA on their pension.
 

How is DA Treated Under Income Tax?

According to the Income Tax Act of 1961, salaried employees are subject to taxation. In cases where salaried employees receive rent-free housing from their employer, and all previously mentioned conditions are met, DA becomes a component of the salary, up to which it becomes a retirement benefit salary component.

As mandated by the Income Tax Act, individuals must declare their DA tax liabilities when filing their tax returns.
 

Difference between DA and HRA

Here is a table outlining the key differences between DA (Dearness Allowance) and HRA (House Rent Allowance).

Role of Pay Commissions in DA Calculation

Pay Commissions help calculate Dearness Allowance (DA) for central government employees. The government appoints these commissions to review and revise central government employees' salary structure and allowances. The DA is calculated based on the average All India Consumer Price Index (AICPI) for the last 12 months and is adjusted twice a year, effective from January 1st and July 1st. The Pay Commissions recommendations are crucial in determining the percentage of DA to be granted to employees, and the government implements these recommendations.

Dearness Allowance Merger

Over the past several years, there has been continuous growth in the dearness allowance for public sector employees, which currently stands at 50% of the basic salary. This increase in DA percentage has been necessary to offset the effects of rising inflation on employee salaries. 
Once the DA percentage crosses the 50% mark, it is generally merged with the basic salary. This merger is expected to provide a significant boost to employee salaries since all other components of the salary are calculated as a percentage of the basic salary.

Employee unions have requested to merge the DA with the basic salary of the government for some time now. While there has been no official announcement yet, the union cabinet is expected to make a decision soon. If the merger is approved, it will be a major benefit for public sector employees, resulting in a substantial salary hike. The anticipation among employees is palpable, and they eagerly await news on this matter.