# Dearness Allowance: Meaning, Types and Formula for Calculation

Priya , Last updated: 09 April 2024

## What is Dearness Allowance(DA)

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.

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 for 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 VIIth Pay Commission made its recommendations in 2016. DA rate that was applicable in 2023 was 46% of the Basic Pay. The DA rate applicable to the year 2024 is expected to be 50%. The Central Government usually announces its revisions of the rate in March and September.

## 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)

This applies to all Central Government Employees and is revised every 6 months as per the Consumer Price Index. VDA remains fixed until 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. Pensioners are retired employees of the 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.

Pensioners are not allowed DA when 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. However, 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%. This would mean a substantial hike in the salaries of central government employees as well as in the other components which are calculated on the basic pay. This demand for the salary hike has been raised with the government and the Union Cabinet is expected to give a decision soon.

Priya
(Student )
Category Income Tax   Report

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