Dearness Allowance (DA) is an allowance paid to meet the cost of living. It helps to offsets the impact of inflation. It varies from employee to employee based on their presence in the urban, semi-urban or rural area. DA is only paid to:
- Central Government Employees,
- Public Sector Employees,
- Pensioners of Central Government.
Dearness Allowance is decided by the Pay Commission in India. The pay commission must evaluate and change the salaries of central/public sector employees based on the various components that make up the final salary of an employee.
Types of Dearness Allowance
Dearness Allowance (DA) is broadly categorised in the following two types:
1. Industrial DA (IDA): It is applicable to Public Sector employees. It is revised quarterly depending on the rising levels of inflation.
2. Variable DA (VDA): It is applicable to Central Government employees. It is revised on a half-yearly basis depending on the rising levels of inflation.
How to calculate Dearness Allowance?
Dearness Allowance is calculated at a fixed percentage of Basic Salary. It is directly related to the employee’s location. Consumer price index in India is provided for the urban sector, semi-urban sector, and rural sector. Hence DA will be different for employees working in each of these sectors. DA is calculated as per the following formula:
For the Central Government Employees:
Dearness Allowance % = [(Average of AICPI(Base year 2001=100) for the past 12 months – 115.76)/115.76]*100
AICPI means All India Consumer Price Index.
For the Public Sector Employees:
Dearness Allowance % = [(Average of AICPI(Base year 2001=100) for the past 12 months – 126.33)/126.33]*100
Taxability of Dearness Allowance
Dearness Allowance is fully taxable in the hands of the employees. It is added to the salary of employee u/s 17(1) of the Income Tax Act. A taxpayer can file ITR-1 if he/she only has salary income up to INR. 50,00,000.
Dearness Allowance for Pensioners
Pensioners are the retired employees of the central government. They are eligible for individual pension or family pension. The pension also gets revised every time the Pay Commission rolls out a new salary structure. Pensioners DA is calculated on the Basic Pension.
No. Dearness Allowance is not applicable to the employees/ pensioners of the private sector. It is only applicable to central/public sector employees/pensioners.
Pensioners who are staying abroad without re-employment are allowed to receive DA on pension. But DA is not allowed to pensioners who are re-employed abroad.
Yes, D.A. differs for the employees depending on their work location. Since D.A. is directly connected to the cost of living, it is not the same for all employees and varies for employees working in rural, urban, and semi-urban areas.
D.A. is merged with the basic salary of an employee when it exceeds the limit of 50%. This merging results in a significant hike in the salary of the employees. Currently, D.A. stands at 50% of the basic salary of an employee.