Dearness Allowance: Central Government Proposes 3% DA Hike

Dearness Allowance is the additional payment the Government and Public Sector Entities make to their Employees and Pensioners.

The intent is to mitigate the effect of rising inflation. DA is a cost-of-living adjustment to the pay to ensure that the salaries and pensions match the rising inflation, thereby keeping the pay on par. This ensures the people’s purchasing power remains intact.

Since DA is related to the cost of living, it depends on the employees’ location which could be the urban sector, semi-urban sector or the rural sector.

Latest Update

With the introduction of the Unified Pension Scheme, the central government may announce a 3-4% hike in dearness allowance (DA) for employees in the third week of September 2024.

For example

If an employee receives basic salary amounting Rs 50,000, then the 3% hike means an additional Rs 1,500 per month.

How to calculate Dearness Allowance?

Dearness Allowance is calculated as a percentage of Basic Salary. It is a fully taxable Allowance and can be in two forms,

• DA given under terms of employment
• DA not given under terms of employment

DA is calculated twice every year, on 1st January and 1st July.

The Dearness Allowance payments are an inflation adjustment and are linked to the Consumer Price Index. CPI is the weighted average price of a basket of goods purchased by households over time. In 2021, the Government revised the base year of the CPI-IW (Industrial Workers) Index from 2001 to 2016. A linking factor of 2.88 was determined in 2021 as well.

Formula to Calculate Dearness Allowance

Formula for Central Government Employees:

DA% = {(A – 261.4)/261.4}*100 Where A = Avg of CPI-IW (base 2016=100) for the past 12 months x linking factor of 2.88

Formula for Public Sector Employees:

DA% = {(A – 126.33)/126.33}*100 Where A = Average of AICPI(Base year 2001=100) for the past 3 months

Example: Assuming a monthly Basic Salary of ₹30000 in 2023, the DA receivable is ₹13,800.

Dearness Allowance and Pay Commission

The Government constitutes a committee to evaluate changes to salaries based on different components. Accordingly, the Pay Commissions look into Dearness Allowance, the various factors to determine the amount of DA and designate the percentage of Basic Pay as Dearness Allowance. The most recent 7th Pay Commission made its recommendations in 2016. DA rate that was applicable in 2023 was 46% of the Basic Pay.

Important Points

DA hiked to 50%

In month of March 2024, the Central government has increased the dearness allowance and dearness relief by increasing 4%.

The DA rate applicable to the year 2024 is 50%.

This hike has provided significant relief to millions of central government employees and pensioners.

Increased Allowances

Salary components including allowances like the Children’s Education Allowance (CEA) and the Hostel Subsidy increased by up to 25%.

Income Tax on Dearness Allowance

As per the Income Tax Act, Dearness Allowance is fully taxable. There are no exemptions on Dearness Allowance. If an employee receives a rent-free accommodation from their work and all the pre-conditions are met then DA becomes part of salary up to which it forms the retirement benefits. Moreover, the DA amount has to be declared separately from the Basic Pay in the Income Tax Return.

Different types of Dearness Allowance

Industrial Dearness Allowance(IDA):

IDA is offered to the Public Sector Employees of the Central Government. IDA is revised quarterly and depends on the Consumer Price Index to offset the rise in Inflation.

Variable Dearness Allowance(VDA):

VDA applies to all Central Government Employees and is revised in every 6 months as per the Consumer Price Index. VDA remains fixed untill the government changes the bare minimum wage.

Pensioners and Dearness Allowance

As per 2023 data, there are 48.67 lakh active central government employees and 67.95 lakh central government pensioners. Individuals who receive pension are the retired employees of Central government who are eligible for either Individual or Family pension. Pensioners are affected by any changes made to the DA by the Pay Commission.

DA are not allowable to pensioners if re-employed by the State Government, Central Government, Local bodies or Public Sector Undertakings in cases where the DA is based on a time scale or fixed pay. In any other case of re-employment, DA is granted as per the last drawn payment.

DA is not paid to any person who has been re-employed abroad. Like, if pensioners are living abroad without re-employment, they are entitled to DA.

Difference between DA and HRA

DA and HRA are not to be confused with each other. Dearness Allowance is an adjustment to combat the rise in inflation. HRA is an allowance provided to employees renting accommodation in their location of work.

DA is fully taxable as per the Income Tax Act, but exemptions are available for HRA.

Merger of Dearness Allowance with Basic Pay

The steady increase in DA% is to fight the adverse effects of rising inflation. It is a practice of the government to merge the DA with Basic Pay if the DA% exceeds 50%.

Means, substantial hike in the salaries of central government employees and in other components which are calculated on the basic pay. The demand for the salary hike was raised with the government and the Union Cabinet.

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