Dearness Allowance (DA) - Definition, Types & DA Calculation

​Dearness allowance (DA) is a major component of the total salary offered to Central Government and Central Public Sector employees. It is provided to offset the aftereffects of inflation and sustain a comfortable living.

Dearness allowance calculation is based on a certain percentage of the basic salary. Several changes were introduced in the Central Government DA allowance.

Understanding what is dearness allowance and its importance can help you manage your finances better.

So, here is everything you need to know about the dearness allowance definition, the types and its calculation.

Dearness Allowance Meaning

Dearness allowance is an additional payment included in the salary offered by the Government to help its employees manage the impact of inflation.

Every public sector employee has a basic salary fixed according to their respective pay scale. However, the basic salary may not be sufficient to offset the effects of inflation and the rising cost of goods and services.

The Government provides a dearness allowance to help you cope with the increasing cost of living. It is calculated as a percentage of your basic salary.

The effect of inflation varies between urban and rural areas, so the dearness allowance calculation also takes these differences into account.

Similar to dearness allowance, dearness relief (DR) is offered to Government pensioners based on their pension amount.

Current DA Rates - Recent Updates 

• The Central Government DA allowance percentage, previously 46%, has been increased by 4%, ​making the total DA percentage 50%.
• It is a change in the dearness allowance calculation effective from 1st January 2024.
• The dearness relief for pensioners has also increased by 4% to reach 50%.

Importance of the Central Government DA Allowance

• Financial Stability- The Centra dearness allowance helps employees ensure financial stability by balancing the impact of the inflation rate.
• Better Financial Planning- It provides an option for better financial planning over the long term to lead a sustainable life in the future.
• Retirement Benefits- It also plays a significant role in ascertaining the retirement benefits as it is accounted for in the calculation of the pension amount.

Now, let us explore how DA is calculated.

Dearness Allowance Calculation

The formula for calculating the dearness allowance was changed in 2006, but it has remained the same since then.

It is calculated differently for Central Government employees and Central Public Sector employees.

• For Central Government Employees

Percentage of DA = [(Average of AICPI (with the base year 2001 = 100) for the previous 12 months - 115.76)/115.76]*100

• For Central Public Sector Employees

Percentage of DA = [(Average of AICPI (with the base year 2001 = 100) for the previous 3 months - 126.33)/126.33]*100

Note:

AICPI - All India Consumer Price Index

Sample Illustration

Let us take a simple example to understand how DA is calculated.

Consider Mr Roy, a Central Government employee with a basic salary of ₹55,000. The previous DA rate of 46% has now been increased to 50%. His revised total salary is outlined in the table below.

Factors that Affect Central Dearness Allowance

• Base Index- This is a predefined year’s index used as a reference. The dearness allowance is determined by comparing the current Consumer Price Index (CPI) with this base index. It helps understand how prices have changed over a certain period of time.
• Consumer Price Index (CPI)- This is the average change in prices of goods and services determined over a period of time, reflecting inflation. The higher the value of the CPI, the higher the DA rate.
• Inflation- Inflation significantly affects the rate of the Central Government DA allowance. If the inflation rate increases, the purchasing power will be reduced. This leads to an increase in the DA to compensate for the higher cost of living requirements.
• Cost of Living- The DA in salary is introduced to help employees manage the increasing cost of living. The cost of living varies depending on the location, whether rural or urban.
• Industrial Average- The industry average reflects the financial performance of the various industries and the standards of employee wages. A growth or decline in the industrial average will significantly affect the DA rate.
• Policy Framework- The dearness allowance calculation is based on the Government’s policy framework, which can vary for various public sector companies.
• Revisions- The frequency and extent of revisions can also affect the rate of central dearness allowance. It is typically revised quarterly or twice a year, in January and June.

Dearness Allowance Types

• Industrial Dearness Allowance (IDA)- IDA is provided to the employees of public sector companies. It is determined based on the Consumer Price Index (CPI) and revised every quarter of the financial year.
• Variable Dearness Allowance (VDA)- VDA is offered to the employees of the Central Government. It is revised twice a year, in January and July.

The VDA is based on a few components.

• Consumer Price Index

It is a component of the VDA that changes every month. It can decrease or increase the value of Variable Dearness Allowance.

• Base Index

It is a component that is fixed and remains constant for a fixed period of time.

• Variable DA Amount

It is a component that remains fixed unless the Government changes the basic minimum wage.

How is Central Dearness Allowance Different from Other Allowances?

Is the Central Government DA Allowance Taxable?

Every individual taxpayer must pay the income tax based on their income tax slab rate. The slab rate is based on their total income, including the dearness allowance for the Central Government employees and pensioners.

Therefore, the Central Government DA allowance is entirely taxable. It is added to the total taxable income at the time of filing the Income Tax Returns (ITR). Eligible taxpayers are mandated to state the dearness allowance separately as they file their ITR.

If the employee is provided with rent-free accommodation, the value of this accommodation is considered part of the salary to determine the retirement benefits. However, it is subject to certain terms and conditions.

Dearness Allowance Merger

The dearness allowance has been constantly rising since 2006 due to the increasing inflation rate. Currently, it has reached 50%.

According to the set rules, if the Central Government DA allowance increases beyond 50%, it has to be merged with the basic salary.

If this happens, the basic salary will see a significant increase. This is a substantial advantage, as many other allowances are calculated depending on the basic salary.

As it is a major development, several ongoing discussions have taken place, and a final decision is expected soon.

Role of Pay Commission in Dearness Allowance Calculation

The Central Government has appointed Pay Commissions to evaluate and update the salaries of the Government employees periodically. The pay commissions consider and evaluate the different salary components, including the dearness allowance, to finalise their pay commission report.

This process includes assessing and reviewing the multiplication factor used in the dearness allowance calculation.

The 7th Pay Commission, the latest one,  was constituted in February 2014 to review the overall salary structure of the Central Government employees.

Difference Between DA and HRA

Dearness Allowance for Pensioners

Retired Central Government employees are entitled to a regular or family pension from the Government. This pension includes a component, dearness relief (DR), similar to the Central dearness allowance offered to current employees.

Whenever the pay commission introduces a new salary structure, the same changes are reflected in the pension. Similarly, if the Central Government DA allowance percentage is revised, the pension is adjusted accordingly.

If pensioners are re-employed, they may not receive the dearness relief if it is based on a fixed pay or time scale. However, they might receive it limited to their last drawn salary.

Pensioners residing outside India during re-employment are not eligible for dearness relief. On the other hand, if they reside abroad without re-employment, they are entitled to the DA on their pension.

How Can You Reduce Your Income Tax?

The Central Government DA allowance is entirely taxable. Although the employees consistently benefit from an increase in their salary, it is subject to taxation.

The Government has introduced several tax deductions and exemption benefits to help individual taxpayers benefit from reducing their income tax liability.

Section 80C and Section 80D are two of the most common tax deduction provisions under the Income Tax Act 1961. While Section 80C applies to the amount spent on certain specified payments and the various savings and investment options, Section 80D is exclusive to health insurance premiums.

The premium paid for health insurance for yourself, your family, and your parents qualifies for the Section 80D tax deduction benefit.

At Reliance General Insurance, we offer a wide range of health insurance plans online for individuals and families. Our plans offer extensive coverage benefits at affordable premiums.

Also Read: Section 80D Health Insurance Tax Deductions.

Frequently Asked Questions About Dearness Allowance

1. What is the full form of DA in salary?

   DA refers to Dearness Allowance. It is calculated as a certain percentage of the basic salary and introduced to balance the impact of inflation.

2. What are the types of DA allowance?

   The two types of DA allowances are the Industrial Dearness Allowance, which applies to Public Sector employees, and the Variable Dearness Allowance, which applies to central government employees.

3. What is the current DA rate?

   The current DA rate is 50%, an increase of 4% from the previous DA rate of 46%.

4. Is the dearness allowance offered to private sector employees?

   No, dearness allowance applies only to the employees of Central Government and Public Sector Organisations.

5. Is the DA included in the basic salary?

   No, DA is not included in the basic salary. It is calculated as a percentage of the basic salary and added to the total salary.

6. Does the Central dearness allowance differ across the country by location?

   Yes, DA is introduced to offset the impact of inflation and balance the cost of living. Since the cost of living varies across different locations in the country, the DA also differs for rural, semi-urban and urban areas.

7. How is DA calculated on pension amount?

   The DA is calculated on the basic pension amount without commutation. This means that the dearness allowance is a certain percentage of the original pension amount.

8. How often is DA revised for the Central Government employees?

   The DA for Central Government employees is revised twice a year, in January and July.

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