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

By Hiral Vakil on March 7, 2019

What is Dearness Allowance?

Dearness allowance is paid to Central Government as well as public sector employees & Pensioners as a part of their salary to meet the cost of living. It is calculated as a percentage of basic salary.

Dearness allowance received as a part of the salary is fully taxable in the hands of the employees.

Salary paid to Government and public sector employees comprises of many components and one of them is dearness allowance. Earlier, the concept of dearness allowance was introduced to meet employees demand wage revisions. The government, later on, linked the same to the Consumer Price Index. The government realised that inflation is a result of market movement and they can not control it beyond a certain level. But what they can do is provide some comfort by way of Dearness Allowance to employees.

How to calculate Dearness Allowance?

Dearness allowance is calculated at a fixed percentage of basic salary. Since dearness allowance is related to the cost of living, it will vary as per employees location. Consumer price index in India is provided for the urban sector, semi urban sector, and rural sector. So DA will be different for employees working in each of these sectors.

Calculation of Dearness allowance percentage:

Dearness Allowance% = [(Average of AICPI(Base year 2001=100) for the past 12 months – 261.4)/261.4]*100

AICPI means All India Consumer Price Index.

Revision at pay commission

Every subsequent pay commission in India reevaluates the salary structure of the public sector. Each component of salary is considered for revision including dearness allowance. Pay commission will also review the multiplication factor for DA and may change the same to meet the cost of living.