Dearness Allowance (DA)
What is Dearness Allowance?
DA which stands for Dearness Allowance is a cost of living expense paid to employees and pensioners by the government to help them cope with the increasing impact of inflation. Dearness Allowance is a fixed component in the basic salary structure of government employees as per the 7th Pay Commission of the Government of India.
It is a benefit provided to pensioners residing in India, Bangladesh, and Pakistan. When filing an Income Tax Return (ITR), it is mandatory to disclose the tax liability associated with DA, as per the rules stated in the Income Tax Act of 1961.
What are the Types of Dearness Allowance?
There are two types of dearness allowance which have been explained in brief here.
1. Variable Dearness Allowance
Variable Dearness Allowance is an allowance given to central government employees after being revised every six months. The change Variable DA amount depends on 3 components:
a. Consumer Price Index or CPI: Measurement of change of prices in a fixed market over time. It changes every month.
b. Base Index: Latest consumer price index.
c. Variable DA amount: This amount is fixed by the central government.
2. Industrial Dearness Allowance
Industrial DA is the allowance given to public sector employees by the Indian government. It is revised quarterly with respect to the Consumer Price Index or CPI to compensate for the rising inflation.
What are the Current Dearness Allowance Rates?
The change in Dearness Allowance rates is observed after every quarter depending on the Consumer Price Index. The monthly increase in DA percent (according to staffnews) in 2023 has been described in the following table.
|July 2023||46% (expected)|
How to Calculate Dearness Allowance?
The calculation of the Dearness Allowance depends on the type of employment of the individual. The calculation for both types is as follows.
Central Government employees:
DA % = ((Average of AICPI (Base Year – 2001=100) for the past 12 months -115.76)/115.76) *100
Central public sector employees:
DA % = ((Average of AICPI (Base Year – 2001=100) for the past 3 months -126.33)/126.33) *100
Where AICPI= All-India Consumer Price Index.
Treatment of Dearness Allowance Under Income Tax
The Dearness Allowance (DA) is subject to taxes according to the Income Tax Act, 1961 under the Government of India. For salaried employees, the entire DA amount is taxable. If an employee receives rent-free, unfurnished accommodation, it is considered as part of their salary. If certain conditions are met, the DA can also contribute to their retirement benefits.
When filing income tax returns (ITR), it is necessary to mention the DA separately as per the IT rules. If the salary income is up to INR 50,00,000, they are eligible to file ITR 1 for their income tax return. For more details refer to the IT rules.
Role of Pay Commission in Dearness Allowance Modification
The role of pay commission in modifying dearness allowance is explained in 5 steps as follows.
1. Evaluation: The Pay Commission examines the components of an employee’s salary, including Dearness Allowance (DA).
2. Adjustment: The Pay Commission makes necessary changes to the DA to ensure it accurately reflects the cost of living and inflation rates.
3. Review: Periodically, the Pay Commission reevaluates the multiplication factor used for calculating DA, considering economic conditions and financial implications.
4. Recommendations: The Pay Commission provides suggestions to the government on modifying DA, considering factors such as employee welfare, budget limitations, and economic stability.
5. Implementation: Upon government approval, the recommended changes to DA are put into effect, resulting in revised allowances for employees.
Dearness Allowance for Pensioners
Dearness Allowance (DA) for pensioners is an additional amount provided to retired individuals to offset the impact of inflation and rising costs of living. The DA for pensioners is typically revised periodically, either annually or biannually, based on the recommendations of the Pay Commissions or as per government guidelines.
The amount of DA for pensioners is calculated as a percentage of the basic pension. The DA for pensioners is taxable as per the Income Tax rules applicable to pension income. It is important for pensioners to mention the DA amount separately when filing their income tax returns.
Frequently Asked Questions (FAQs)
Q. Is Dearness Allowance granted to pensioners who stay abroad?
No, Dearness Allowance (DA) is not granted to pensioners while they are employed outside India. However, if pensioners are residing abroad without reemployment, they are eligible to receive DA on their pension. It is important to be aware of the specific guidelines regarding DA for pensioners residing abroad, as they may vary depending on the organization providing the pension.
Q. Does Dearness Allowance differ based on an employee’s work location?
Yes, Dearness Allowance (DA) can differ based on an employee’s work location. DA is typically calculated and adjusted to account for the cost of living and inflation rates in different regions or cities. Since the cost of living can vary significantly across different locations, the DA amount may be higher in areas with a higher cost of living and lower in areas with a lower cost of living.
Q. When is Dearness Allowance merged with the basic salary of an employee?
When the Dearness Allowance (DA) exceeds a limit of 50%, it is merged with the basic salary of an employee. This merging leads to a substantial increase in the employee’s salary. This was recommended under the recommendation of the 5th Central Pay Commission of the Central Government.
Q. When is the pension for public sector employees revised?
The pension for public sector employees in India is typically revised based on the recommendations of the Pay Commissions. The exact timing of pension revisions can vary depending on the government’s decision to appoint a new Pay Commission and the duration of time since the previous revision.
Q. Do private-sector employees receive Dearness Allowance?
No, private-sector employees are not eligible to receive a dearness allowance. Dearness Allowance is only applicable to public sector employees, central government employees, and pensioners.
Q. How is DA calculated online?
DA is calculated online by taking 3 main inputs: Pay Matrix Level, Basic Salary, and Rate of Transport Allowance. You can calculate your Dearness Allowance using an online DA Calculator.