Dearness Allowance (DA)

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.

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.

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.

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.

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.