Dearness Allowance: Meaning, Calculation and Types

DA stands for dearness allowance. The IV Central Pay Commission recommended the grant of DA on a ‘percentage system’ of the basic pay (1986).

It has also recommended the payment of DA be done twice a year; on1 January and 1 July respectively. Here, each installment of DA was to be calculated with reference to the percentage increase in the 12 monthly average of the All India Consumer Price Index (base 1960). The extent of neutralisation now ranged from 100% to 65%.

What is Dearness Allowance?

Dearness Allowance (DA) is a cash allowance paid to government employees and pensioners in India to compensate for the rise in the cost of living. It is usually a percentage of the employee’s salary.

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. dearness allowance 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 dearness allowance 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 dearness allowance 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: 

1. Base Index – The Base index remains unchanged for a pre-decided time.
2. Consumer Price Index – The Consumer Price Index changes every month, causing an increase or decrease in the variable DA.
3. 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.

How is Dearness Allowance treated under Income tax? 

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 Dearness Allowance Rate

As we all know, every government employee is entitled to receive dearness allowance, calculated as a portion of an individual’s basic salary. Every 6 months, this allowance is increased, i.e., the change in the dearness allowance 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 the dearness allowance unchanged till June 2021. 

Although it is expected that the central  Government may announce at least a 4% hike in the existing dearness allowance very soon. This hike in dearness allowance will result in the increased monthly income of the central government employees, but not until June 2021. 

Frequently Asked Questions