Dearness Allowance (DA): What is it? and How to calculate it?

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By Hiral Vakil on February 12, 2020

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. 

Dearness Allowance increased by 5% from 12% to 17% from July 2019. Nearly 50 lakh government employees and 65 lakh pensioners will be benefited from this hike.

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.

FAQs

1. Is Dearness Allowance applicable to the employees and pensioners of the private sector?

No. Dearness Allowance is not applicable to the employees/ pensioners of the private sector. It is only applicable to central/public sector employees/pensioners.

2. Is Dearness Allowance granted to pensioners who stay abroad?

Pensioners who are staying abroad without reemployment are allowed to receive DA on pension. But DA is not allowed to pensioners who are reemployed abroad.