The central government compensates its employees for the increased cost of living by providing Dearness Allowance (DA). It is offered to help government employees offset the impact of inflation.
What is Dearness Allowance (DA)
If you are a government employee in India, you know that being one has its own benefit, and one of them is DA. Under the ‘cost of living’ category, the amount that the employees get from the government is called DA.
Both pensioners and employees from the central government and public sector get this DA. This system is followed not only in India but also in other countries like Bangladesh and Pakistan.
An individual’s salary comprises several parts like HRA, DA, contribution to provident fund, etc. DA is a fixed proportion of the basic salary to protect the employees from inflation.
The percentage of this allowance varies from person to person, depending on their location and the cost of living there. That is why the amount of DA provided to employees located in rural, urban, and semi-urban areas differs. Central public undertaking employees and central government employees also differ. The percentage of DA is continuously revised to help people cope with inflated prices and lead a healthy lifestyle.
Types of Dearness Allowance
For ease of calculation, DA is divided into two separate categories:
1) Industrial Dearness Allowance (IDA): This type of allowance is extended to public sector employees. The IDA is revised every quarter of the financial year depending on the CPI (Consumer Price Index) to hedge the inflation cost.
2) Variable Dearness Allowance (VDA): This type of allowance is extended to central government employees. The VDA is revised twice a year, i.e., every six months considering the increase/ decrease in the CPI (Consumer Price Index).
The VDA depends on three constituents:
Base Index – The Base index remains unchanged for a pre-decided time.
Consumer Price Index – The Consumer Price Index changes every month, causing an increase or decrease in the variable DA.
Variable DA Amount – The Government must set and revise the minimum wage amount. Usually, the government fixed the Variable DA amount as it remains fixed until any revision happens.
Tax Implications on Dearness Allowance
DA is fully taxable for public sector employees under the Income Tax Act 1961. The component of DA also needs to be declared separately when filing the Income Tax Returns.
How is Dearness Allowance Calculated
There are two different methods used to calculate DA for central public sector employees and central government employees. Both of them being:
For central government employees:
The following method is used to calculate DA for central government employees:
((Average of All-India Consumer Price Index (with the base year 2001 = 100) for the past 12 months – 115.76) / 115.76) * 100
For central public sector employees:
The following method is used to calculate DA for central public sector employees:
((Average of All-India Consumer Price Index (with the base year 2001 = 100) for the past 3 months – 126.33) / 126.33) * 100
Dearness Allowance for Pensioners
Public sector and government retired employees enjoy the benefits every time the government revises the salary structure. With the revised salary structure being released for the public sector employees, the retired public sector employee’s pension is also revised.
The retired public sector employee’s pension comprises both regular pension and family pension. Any change in the pension is reflected in both the pensions. The amount of DA in the case of pensioners is calculated on their basic pension, excluding commutation. Therefore, the pensioners received a specific percentage of the original pension as DA.
Difference Between DA and HRA
The central government provides DA to its employees to hedge the impact of inflation. In contrast, HRA is provided to employees to cover the additional cost of renting accommodation for residential purposes. HRA is provided to both the public sector and private sector employees, whereas DA is specifically for the central government employees.
Current DA Rate
As we all know, every government employee is entitled to receive DA, calculated as a portion of an individual’s basic salary. Every 6 months, this allowance is increased, i.e., the change in DA percentage applies on 1st January (for months from January to June) and 1st July (for months from July to December).
Currently, central government employees are entitled to receive 17% of their basic salary as DA. In 2020, the central government decided to keep DA unchanged till June 2021.
Although it is expected that the central Government may announce at least a 4% hike in the existing DA very soon. This hike in DA will result in the increased monthly income of the central government employees, but not until June 2021.