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Dearness Allowance (DA)

Employers in the public sector pay salaries to their employees which is divided into various components. One of these components is the Dearness Allowance. Introduced in the World War II, Dearness Allowance or DA was initially known as ‘Dear Food Allowance’. In the initial years, Dearness Allowance was provided to employees by the government as a demand for wage revision was raised. However, later it was linked to the Consumer Price Index. There have been attempts to revise and restructure the percentage of Dearness Allowance by a number of committees in the Central Government.

Payment of dearness allowances becomes even more significant in a country like India, because of the subdivision of various Indian states into villages, towns and cities. This component of the salary takes care of the change in the cost of living, which is highly dependent upon the location of the employee. Especially for government sector employees, job transfers are common and an essential feature. Therefore, dearness allowance becomes all the more significant so as to hedge the inflation cost of living difference and the increasing rate of inflation.

What does Dearness Allowance mean?

In layman terms, dearness allowance is defined as the cost of living adjustment allowance which the government offers to public sector employees, as well as pensioners of the same. Dearness Allowance is a component of the salary which is applicable to employees in India as well as Bangladesh.

Basically, Dearness Allowance is understood as a component of salary which is a fixed percentage of an employee’s basic salary, which aims to hedge the impact of inflation. Since, this allowance is related to the cost of living, the Dearness Allowance component differs for various employees based on their location. This implies that Dearness Allowance is different for employees working in the urban sector, semi-urban sector and the rural sector.

Income Tax and Exemption Limit Chart for Dearness Allowance

According to the Assessment Year 2017-18, Dearness Allowance is fully taxable for individuals who are salaried employees. In case the said employees are offered rent free accommodation by the employer, which is unfurnished, wherein all prerequisites are met, dearness allowance becomes part of the salary to the extent wherein it forms a component of the retirement benefit salary.

Income Tax Act, 1961 has made it mandatory that tax liability for Dearness Allowance has to be declared in the filed returns.

Calculation of Dearness Allowance

Post the Second World War, dearness allowance was introduced as a component by the government. After 2006, formula for calculating dearness allowance has been changed and currently, DA is calculated as mentioned below for the following set of employees-

For Central Government employees:

Dearness Allowance % = ((Average of AICPI (Base Year 2001=100) for the past 12 months -115.76)/115.76)*100

For Central public sector employees after 1/1/2007:

Dearness Allowance % = ((Average of AICPI (Base Year 2001=100) for the past 3 months -126.33)/126.33)*100

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

From 1st of January 1996 onwards, dearness allowance is included in order to compensate for the price rise or inflation, in a specific financial year. Therefore, it is revised biannually, i.e. once on 1st January and then, on 1st July.

Industrial Dearness Allowance

Industrial dearness allowance or IDA is defined as the allowance applicable to employees of the public sector enterprises. In the recent times, the Government of India has increased IDA by 5% for this sector. This decision was brought forth in order to benefit all board level executives, officers and employees of central PSUs.

Industrial Dearness Allowance for the Government sector enterprises is on quarterly revision and this is done based on the movement of the Consumer Price Index (CPI). This is practised so as to compensate for the rising inflation in the country.

What is Variable Dearness Allowance?

Variable dearness allowance, or more commonly known as VAD, is defined as the allowance which is a direct result of six months revision for central government employees. The new figure that is received post change, as a result of factoring in the rise or decline in the Consumer Price Index or CPI, is known as Variable dearness allowance. On the basis of this figure, the Dearness allowance of the employees is revised and then rolled out.

Variable Dearness Allowance majorly has three components:

  • The consumer price index

  • The base index

  • The variable DA amount fixed by the Government of India

The third component is always fixed until the government revises minimum wages for employees. Similarly, the base index remains fixed for a stipulated period of time. It is only the CPI or Consumer Price Index that changes every month. This ends up affecting the overall value of the variable dearness allowance.

What is Dearness Allowance Merger?

Since 2006, dearness allowance offered to employees from the public sector has been continuously on the rise. Currently, the figure stands at 50% of an employee’s basic salary. This has happened over a number of years during which the DA percentage rose steadily in order to hedge the rising inflation.

As a rule, it is practice to merge the DA with the basic salary once the DA percentage breaches the 50% mark. This is supposed to be a great salary booster for employees since all other components of the salary are calculated as a percentage of the basic salary. Demands for merging the DA with the basic salary have been with the government for quite some time. The union cabinet is expected to take a decision on this matter soon. In the meantime, employees from the public sector are ecstatic with anticipation of a merged DA which would mean a major hike in their salaries.

Hike in Dearness Allowance according to New Development under the recent Budget 2018

It was quite a relief to most central government employees when the hike in the Dearness Allowance was announced. The Union Cabinet raised the Dearness Allowance of government employees by 2% recently. This move was spearheaded by Indian Prime Minister, Mr. Narendra Modi, and is aimed at benefiting almost 50 lakh Central Government employees and around 55 lakh pensioners. In an effort to reduce the inflation effects on the salaries of these employees, dearness allowance hike is generally offered to pensioners and staffers.

2018 has been the year of drastic changes on the taxation ecosystem. The new budget brought a number of new advancements and developments. The Dearness Allowance was increased to 7% from an earlier rate of 5%, for almost more than 11 million government employees.

As per the proposed changes, this increase in DA in all probability, will work in the favour of more than 48.41 lakh central employees and 61.17 lakh pensioners and staffers.

Role of Pay Commission in DA Modification

In India, every subsequent pay commission is expected to re-evaluate the salary of public sector employees, post factoring in the different components of salary. Dearness Allowance is also taken into consideration when the next pay commission report is rolled out. Pay commissions account for all the factors that are a part of the calculation of salaries of personnel in the public sector. Revision and changing the multiplication factor, too, falls under the purview of the pay commissions.

Pensioner’s Dearness Allowance

The pension for retired employees of the public sector is revised, each time a new salary structure is proposed by a pay commission. So is the case with Dearness Allowance. Every instance when DA is increased by a predetermined percentage, the change is reflected in the pensions of retired public sector employees. This is applicable for both regular pension as well as family pension.

FAQs for Dearness Allowance

What is Dearness Allowance?

Dearness Allowance is a component of one’s salary that takes care of the change in the cost of living, which is highly dependent upon the location of the employee.

What is variable dearness allowance?

Variable dearness allowance, or more commonly known as VAD, is defined as the allowance which is a direct result of six months revision for central government employees.

What is the difference between Dearness Allowance and House Rent Allowance?

Dearness allowance is calculated as a specific percentage of the basic salary which is then added to the basic salary along with other components like HRA (House Rent Allowance) to make up the total salary of an employee of the government sector.

On the other hand, HRA or House Rent Allowance is the salary component given by an employer to an employee in order to meet expenses related to the renting of accommodation which the employee takes for residential purposes. HRA is applicable to both employees from the private sector as well as the public sector whereas DA is majorly applicable to employees working in the public sector.

Does Dearness Allowance vary based on location of employment?

Yes, Dearness Allowance is different for employees working in urban, semi urban and rural locations.

When is the pension for public sector employees revised?

Pension for retired employees of the public sector is revised each time a new salary structure is proposed by a pay commission.

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