In India, when it comes to employment people are engaged in private as well as public sectors. Based on a recent estimate, out of 4 crore salaried employees in India there are nearly 50 Lakh government employees and around 68 Lakh government pensioners including family pensioners. Salary includes various components, one of them is Dearness Allowance (DA). It is only paid to government/ private sector employees to meet the cost of inflation.
What is Dearness Allowance?
Dearness allowance forms a part of the salary structure. Due to the rapid increase in inflation DA is paid to government employees to offset the impact of inflation. It varies from employee to employee based on their location in the urban, semi-urban or rural area. DA is paid only to:
- Central Government Employees,
- Public Sector Employees,
- Pensioners of Central Government.
Pay Commission in India decides the rate of this allowance. 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 DA
There are broadly following two categories of DA:
- Industrial Dearness Allowance (IDA)
- IDA is applicable to Public Sector employees. It is revised quarterly depending on the rising levels of inflation.
- Variable Dearness Allowance (VDA)
- Variable Dearness Allowance is applicable to Central Government employees. It is revised on a half-yearly basis depending on the rising levels of inflation.
- Variable Dearness Allowance fixed by the government remains the same unless basic minimum wages are revised.
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How to Calculate DA?
It is calculated at a fixed percentage of the Basic Salary. It is directly related to the employee’s location. The 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
DA % = [(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
DA % = [(Average of AICPI(Base year 2001=100) for the past 12 months – 126.33)/126.33]*100
Role of Pay Commissions to Calculate Dearness Allowance
The pay commission must evaluate and change the salaries of public sector employees based on the various components that make up the final salary of an employee. Therefore, DA is also considered by the Pay Commissions while preparing the subsequent pay commission report.
It is the responsibility of the pay commissions to take into account every factor that helps with the calculation of the salaries. This also includes the periodic reviewing and updating of the multiplication factor for the calculation of the Dearness Allowance.
Taxability of Dearness Allowance
It is fully taxable in the hands of the employees. It is added to the salary of the employee u/s 17(1) of the Income Tax Act. A taxpayer can file ITR 1 if they only have a salary income up to INR 50,00,000.
Dearness Allowance for Pensioners
Pensioners are retired employees of the central government. They are eligible for individual pensions or family pensions. The pension also gets revised every time the Pay Commission rolls out a new salary structure. DA is calculated as a percentage of Basic Salary similarly pensioners’ DA is calculated on the Basic Pension.
FAQs
No. It is not applicable to the employees/ pensioners of the private sector.
Pensioners who are staying abroad without re-employment are allowed to receive DA on pension. But DA is not allowed for 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.
Hey @sushil_verma
There are a wide range of deductions that you can claim. Apart from Section 80C tax deductions, you could claim deductions up to INR 25,000 (INR 50,000 for Senior Citizens) buying Mediclaim u/s 80D. You can claim a deduction of INR 50,000 on home loan interest under Section 80EE.
Hey @Dia_malhotra , there are many deductions that you can avail of. Your salary package may include different allowances like House Rent Allowance (HRA), conveyance, transport allowance, medical reimbursement, etc. Additionally, some of these allowances are exempt up to a certain limit under section 10 of the Income Tax Act.
For eg,
Tax on employment and entertainment allowance will also be allowed as a deduction from the salary income. Employment tax is deducted from your salary by your employer and then it is deposited to the state government.
The benefit Section 80EEB can be claimed by individuals only. An individual taxpayer can claim interest on loan of an electric vehicle of up to INR 1.5 lacs u/s 80EEB. However, if the electric vehicle is used for the purpose of business, the vehicle should be reported as an asset, loan should be reported as a liability and the interest on loan can be claimed as a business expense irrespective of the amount. (We have updated the article with the changes).
Thus, if you have a proprietorship business, you should claim interest amount as a business expense only if the vehicle is used for business purpose. However, if it is used for personal purpose, you can claim deduction of interest u/s 80EEB in your ITR since you would be reporting both personal and business income in the ITR (under your PAN).
As per the Income Tax Act, the deduction under Section 80EEB is applicable from 1st April 2020 i.e. FY 2020-21.
Hey @Sharath_thomas , we have updated the content according to the appropriate assessment year. Thanks for the feedback.
No issues. You’re welcome!
Hey @shindeonkar95
In case of capital gain income (LTCG/STCG), transfer expenses are allowed as deduction, except STT.
However, in case of business income (F&O, intraday), all expenses incurred for the business (including STT) are eligible to claim deduction in ITR.
Hope, it helps!
Hello,
Is it possible to claim deductions under S. 80CCF for Infra bonds bought in the secondary market and held to maturity?
There were a number of 10 year infra bonds issued in the 2010- 2013 period, which will start maturing soon. These are all listed on the exchanges (although hardly any liquidity or transactions in them). If I were to buy some of these bonds in the open markets and hold them in my demat to maturity (<3 years), is it possible to claim tax deductions (upto 20k per year) under 80CCF for buying?
I couldn’t find anything on this. Any help is appreciated.
Hello @Veejayy,
Yes you can claim deduction under 80CCF for investment made in specified infrastructure and other tax saving bonds bought in the secondary market and held to maturity.
Deduction under Section 80CCF can be availed only through investment in certain tax saving bonds, issued by banks or corporations after gaining permission from the government which shall be restricted upto 10,000 per year.
These bonds are generally long term bonds, having tenure of more than 5 years with a lock in period of 5 years in most of the cases. These bonds can be sold after the lock in period!
Also, interest earned on these bonds will be taxable.
Hope this helps!
Hi, I need to file my income tax for FY21, I am using Quicko platform for filing, I wanted to confirm if the ELSS investment amount for the FY21 is to be added in the section 80C, since I already the amount of Rs30,072 , should I add my ELSS amount to this existing amount and submit the total
Hey @Sheirsh_Saxena, yes, the investment amount needs to be added under 80C.