India has continuously been experimenting with various measures to curb the effects of rising inflation in the country. Food is the commodity that gets hit the most, and this often has a direct impact on the economy itself. Therefore, Dearness Allowance/ DA comes in to play a vital role in protecting the everyday lives of citizens from the adverse effects of the rising prices. Earlier, Dearness Allowance was offered by the Government of India to its employees when demands for wage revision was raised. However, over time, it was linked to the Consumer Price Index.
All public sector employers pay basic salaries to their employees according to the respective pay scale. Several other components are then calculated added in respect to the basic salary and are then added to it to calculate the take-home amount.
What is Dearness Allowance?
Dearness Allowance is paid by the government to its employees as well as a pensioner to offset the impact of inflation. The effective salary of government employees requires constant enhancement to help them cope up with the increasing prices. Despite several measures by the government to control the rate of inflation, only partial success has been achieved because the prices move according to the market.
It, therefore, becomes essential for the government to shield its employees from the adverse effects of inflation. As the impact of inflation varies according to the location of the employee, dearness allowance is calculated accordingly. Thus, DA varies from employee to employee based on their presence in the urban, semi-urban or rural sector.
The salaries received by employees in the Public Sector is divided into various components. One of these components is the Dearness Allowance. The Government pays DA to its employees in order to offset the impact of inflation. This would include pensioners as well. Constant enhancement is essential for the effective salaries of Government employees in order to help them to keep up with the rising prices.
Calculation of Dearness Allowance
Dearness Allowance is provided to employees in order to protect them against the rise in prices in a financial year. Since 1996, Dearness Allowance has been included to compensate for the increase in costs/ inflation in a particular financial year. Every year, it is calculated twice, once in January and then, in July. The current calculation of Dearness Allowance is executed using the formula that the Government established in the year of 2006. Dearness Allowance is calculated accordingly:
For Central Government Employees
DA% = [(Average of AICPI (Base Year 2001 = 100) for the last 12 months – 115.76)/115.76] x 100
For Public Sector Employees
DA% = [(Average of AICPI (Base Year 2001 = 100) for the last 3 months – 126.33)/126.33] x 100
Here, AICPI means All-India Consumer Price Index.
Treatment of Dearness Allowance under Income Tax
As per the latest updates, DA is fully taxable for salaried employees. If the employee has been provided with an unfurnished rent-free accommodation, it becomes that part of the salary up to which it forms the retirement benefit salary of the employee, provided that all other pre-conditions are met. The Income Tax rules in India require the dearness allowance component to be mentioned separately in the returns that have been filed.
DA for Pensioners
Every time a new pay structure is rolled out by a salary commission, the pension for retired public sector employees is revised too. Same goes for Dearness Allowance. Every time the Dearness Allowance is increased by a certain percentage, the same change is also reflected in the pensions received by the retired public sector employees. This applies to both regular pension and family pension as well.
Pensioners, in this case, are those retired employees of the central government who are eligible for either the individual or family pension from the government. Every time the Pay Commission rolls out a new salary structure, the change is also reflected in the pension of the retired employee. Likewise, if the Dearness Allowance is changed by a particular percentage, the pension of the retired personnel is revised accordingly.
Pensioners cannot get DA when re-employed, and DA is granted on a time scale or fixed pay. However, pensioners can sometimes get DA when they are re-employed, limited to their last drawn pay. DA is not paid to pensioners when they reside in a foreign country during re-employment. But pensioners residing abroad without being re-employed are eligible to get DA on their pension.
Types of Dearness Allowance
Industrial Dearness Allowance (IDA) applies to the Public sector employees of Central Government. The Industrial Dearness Allowance for public sector employees undergoes quarterly revision depending on the Consumer Price Index to help offset the impact of rising levels of inflation.
Variable Dearness Allowance (VDA) applies to the employees of the Central Government. It is revised every six months according to the Consumer Price Index to help offset the impact of rising levels of inflation. VDA in itself is dependent on three different components as given below.
- Base Index – remains fixed for a particular period.
- Consumer Price Index – impacts VDA as it changes every month.
- Variable DA amount that has been fixed by the Government remains fixed unless the government revises the basic minimum wages.
Dearness Allowance vs House Rent Allowance
Dearness Allowance is estimated as a particular percentage of an employee’s basic salary. This is then added to the basic salary along with various other components such as House Rent Allowance/ HRA to make up the total salary of a Government Sector employee.
House Rent Allowance/ HRA is the salary component provided to an employee by their employer to meet the expenses with respect to the accommodation. This allowance applies to both the employees of the Private Sector and the Public Sector as well. On the other hand, DA applies primarily to Government employees or the employees working in the Public Sector.
Dearness Allowance Merger
Ever since the revision of the calculation formula, the DA for public sector and central government employees has been consistently rising. Presently, it stands at 50% of the basic salary. This has been a result of the constant enhancement in the DA ever year to offset the adverse effects of inflation. As per the rules, it is a practice to merge the DA with basic salary when it crosses the level of 50%. If this is done, it would mean a significant salary hike for the employees as all other components of the salary are calculated based on the basic salary. The demand has been raised with the Government, and a decision is soon expected on these lines. If the decision is made in favour of the employees, it would significantly boost their salaries.
Changes in Dearness Allowance as per the Budget 2018
As per an estimate, there are more than 50-lakh central government employees who receive the salary from the government. Then there are another 55-lakh retired central government employees who are eligible for a pension. As per the recent announcement by the central Government in Budget 2018, the Dearness Allowance was hiked by 2%.This came as a significant relief for all these beneficiaries as their Dearness Allowance was enhanced from 5% to 7%. These changes are going to significantly benefit all the employees and pensioners of the Central Government.
FAQs
Q: Is there DA taxable?
Yes, DA is fully taxable.
Q: Does the DA amount differ based on the location of work?
Yes, DA differs for each employee depending on their work location. DA is directly connected to the cost of living. Thus, it is not the same for all employees and varies for employees working in urban, rural and semi-urban areas.
Q: How is DA computed on pension?
DA for pensioners is computed on the basic pension without commutation. Thus, employees will receive a specific percentage of their original pension as DA.
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