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

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:

  • Central Government Employees,
  • Public Sector Employees,
  • Pensioners of Central Government.

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.
Tip
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:

  • Industrial DA (IDA)
    • It is applicable to Public Sector employees. It is revised quarterly depending on the rising levels of inflation.
  • 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.

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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

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.

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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.

Dearness Allowance Changes as per Budget 2018

There are roughly more than 50-lakh central government employees who receive the salary from the government. Then there are another 55-lakh retired central government employees who are eligible for a pension. As per the recent announcement by the central Government in Budget 2018, the Dearness Allowance was hiked by 2%.This came as a significant relief for all these beneficiaries as their Dearness Allowance was enhanced from 5% to 7%. These changes are going to significantly benefit all the employees and pensioners of the Central Government.

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.

Got Questions? Ask Away!

  1. 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.

  2. 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,

    • Medical allowance is exempt up to INR 15,000 on a reimbursement basis.
    • Children education allowance is exempt up to Rs. 200 per child per month up to a maximum of two children.
    • Conveyance allowance is exempt up to a maximum of Rs. 1600 per month.

    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.

  3. 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.

  4. Hey @Sharath_thomas , we have updated the content according to the appropriate assessment year. Thanks for the feedback.

  5. 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!

  6. 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.

  7. 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!

  8. 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

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