Dearness Allowance (DA) is a component of your salary that you’ll find listed in your monthly salary slip. And the history of DA can be traced back to the Second World War when it was first introduced.
Back then, it was known as the ‘Dear Food Allowance’. It was given to employees in response to their demand for wage revision. Later on, this allowance got connected to the Consumer Price Index (CPI). And ever since then, there have been countless revisions made to the Dearness Allowance percentage.
In a country like India, the Dearness Allowance becomes all the more important. It takes care of the changes in the cost of living as per the location the employee resides in. Moreover, the Dearness Allowance also tackles the increasing inflation in our country.
Having said that, knowing about DA is quite significant. And this article will tell all you need to know about DA.
What is meant by Dearness Allowance (DA)?
Dearness Allowance (DA) is a kind of adjustment allowance to compensate for your cost of living. It is given by the Government to its Public Sector Employees and pensioners. The objective of offering DA is to cope with the increasing inflation.
It is a salary component applicable to both employees of India and Bangladesh. And it varies from one employee to another based on the location they live in. So, employees living in urban, semi-urban, and rural areas will receive different Dearness Allowance.
Keep in mind that DA is a fixed percentage included in your basic salary and the percentage is decided by the Government. So, once you download your salary slip, you’ll find the details of DA written on it.
Types of Dearness Allowance
For ease of calculation, Dearness Allowance (DA) can be divided into two types Industrial Dearness Allowance and Variable Dearness Allowance.
1. Industrial Dearness Allowance (IDA)
Industrial Dearness Allowance is offered to the Public Sector Employees of the Central Government. The IDA is revised every quarter as per the shift in the Consumer Price Index (CPI). It attempts to check the imbalance caused due to inflation.
Currently, the Government has raised the IDA by 5% to profit all the board level executives, employees, and officers of the Central PSUs.
2. Variable Dearness Allowance (VDA)
Variable Dearness Allowance is provided to the employees working under the Central Government. It is revised half-yearly as per the Consumer Price Index to fight the effects of inflation.
Moreover, the VDA is dependent on 3 other components:
- Base Index
The base index stays fixed for a specific period of time.
- Consumer Price Index
The Consumer Price Index changes every month and in turn impacts the Variable Dearness Allowance.
- Third Component
The third component remains fixed as long as the Government revises its employees’ minimum basic wages. And the base index also stays fixed for a specific time. But, the Consumer Price Index (CPI) changes every month and affects the Variable Dearness Allowance
Dearness Allowance Merger
It is a rule to merge the Dearness Allowance (DA) with your basic salary every time it exceeds the 50% bar. This turns out to be great for employees as it increases their salary by a huge percentage. Moreover, all components mentioned in the payslip are calculated as percentages of your basic salary.
Ever since 2006, the DA provided to the PSU employees has increased continuously. As of today, the DA is 50% of the employee’s basic salary after years of a steady increase in the DA percentage.
Calculation of Dearness Allowance (DA)
DA Calculation Formula for the Central Government Employees:
Dearness Allowance (%) = [(Average of AICPI (With Base Year 2001 = 100) for the last 12 months – 115.76)/115.76] * 100
DA Calculation Formula for Public Sector Employees working under the Central Government Employees ( effective from 1st January 2007):
Dearness Allowance (%) = [(Average of AICPI (With Base Year 2001 = 100) for the last 3 months – 126.33)/126.33] * 100
Where, AICPI = All India Consumer Price Index
Income Tax Applicable on Dearness Allowance
As per the Assessment Year 2017 – 2018, the DA is taxable for the salaried employees. But if the employees are provided rent-free accommodation by their employer, then the Dearness Allowance will become a part of the employees’ salary. And it will also become a part of the retirement benefit salary. Moreover, you need to declare the tax liability under DA in your income tax returns as per the Income Tax Act.
Dearness Allowance (DA) for Pensioners
Pensioners are the retired employees of the Central Government who receive an individual or family pension. The Government’s Pay Commission brings out a new salary structure now and then. So, every time this happens, the change is also witnessed in the pensions.
Similarly, if the Dearness Allowance changes by a specific percentage, then the pension is also revised as per that.
Changes in DA as per the 2018 Budget
The announcement for the 2018 Budget stated the 2% hike in the Dearness Allowance. So, this was good news for all the government employees and pensioners as their DA increased from 5% to 7%.
This move benefitted around 50 lakh employees and over 55 lakh pensioners under the Central employees.
Relation Between Pay Commission and DA Modification
Pay Commission is responsible for all the factors involved in the calculation of the salaries of the public sector employees. The Pay Commission must re-evaluate the salaries of the PSU employees after considering all the components of their salaries.
Meanwhile, the DA is also evaluated before rolling out the next pay commission. All kinds of revisions and hikes are also included under their overseeing.
Q1. How is the Dearness Allowance different from the House Rent Allowance?
Ans. You’ll find both the Dearness Allowance (DA) and the House Rent Allowance (HRA) listed in your downloaded salary slip. But, both are very different from one another. DA is a component of your salary that aims to compensate for the rise in the inflation rate. It is calculated as a percentage of your entire salary.
On the other hand, HRA is the component of your salary that is meant to meet your accommodation expenses. It is offered to both private sector and public sector employees but the DA is offered to PSU employees only. Moreover, HRA is tax-exempt but DA is fully taxable.
Q2. Does the DA vary as per the location you are employed at?
Ans. Yes, the Dearness Allowance varies as per the location you work at. It is different for employees working in different locations like urban, semi-urban, and rural.
Q3. Is the Dearness Allowance tax-exempt?
Ans. No, the Dearness Allowance is fully taxable according to the decisions made in the Assessment Year 2017-18.
Q4. When is the Dearness Allowance revised?
Ans. The Dearness Allowance (DA) is revised every year since it helps employees tackle inflation. So, it is revised half-yearly, once in January and then again in July.
Q5. Is the Dearness Allowance also offered to pensioners?
Ans. Yes, as per the Pension Rule 50.A, the Dearness Allowance is also provided to individual and family pensioners.