Dearness Allowance (DA): Rules, Exemptions, and Calculations

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Hiral Vakil

Dearness Allowance
Salary Components
Salary Income

What is the Dearness Allowance?

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:

The 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.
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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

It is broadly categorised in the following two types:

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How to Calculate Dearness Allowance?

It is calculated at a fixed percentage of 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

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Taxability of Dearness Allowance

It 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 a salary income up to INR 50,00,000.

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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.

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FAQs

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

No. It is not applicable to the employees/ pensioners of the private sector.

Is Dearness Allowance granted to pensioners who stay abroad?

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.

Does Dearness Allowance differ on the basis of work location of an employee?

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.

When is Dearness Allowance merged with the basic salary of an employee?

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.

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