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Dearness Allowance in India and the Various Factors Under it

Dearness Allowance is an allowance paid to government employees, corporate employees and pensioners to compensate the rising cost of living or the expenses incurred on daily necessities. Dearness Allowance can be basically explained as a part of the salary component, comprising of a fixed percentage which is determined by the basic salary. DA has been implemented in India with the goal of maintaining a consistency over the rising impact of inflation.

The nature of Dearness Allowance is such that it is directly related to the cost of living in India. The amount of DA paid differs from one employee to another, based on the location where the employee is stationed. DA amount is different for employees residing in urban city, semi-urban and rural parts of India.

Initially, Dearness Allowance was given by the government to government servants because of the demand for wage revision but, it later got linked with Consumer Price Index. The Central Government of India has appointed a number of committees who have the authority over revising or restructuring the percentage of DA.

In India, Dearness Allowance amount of the salary is a significant compensation as the country is divided into diverse states, cities, towns and villages. Owing to the differences in the living cost from one location to another, DA becomes an integral part of the salary adapting to these variations. Individuals employed in the government sector also face greater chances of being transferred from one city of residence to another when job location changes. As such, DA helps in making the change more welcoming by curbing the inflation cost differences.

Dearness Allowance Calculation

As per the policy laid down for the Assessment Year 2017-18, Dearness Allowance is taxable for every salaried individual. If an employee is allotted a rent free, unfurnished accommodation, Dearness allowance becomes a part of the employee’s retirement benefit salary.

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The Income Tax Act of India states that it is mandatory that every taxpayer must declare the tax liability upon Dearness Allowance while filing income tax returns.

The formulae for calculating Dearness Allowance are as follows:

Dearness Allowance for Central Government employees:

AICPI = All-India Consumer Price Index

Dearness Allowance Percentage (DA %) = {Average of AICPI (Base Year 2001 = 100) for the past 12 months -115.76}/115.76 x 100.

Dearness Allowance for Central public sector employees:

Dearness Allowance Percentage (DA %) = {Average of AICPI (Base Year 2001 = 100) for the past 3 months -126.33}/126.33 x 100.

It was in the year 1996 when Dearness Allowance became included in the salary structure to compensate for price rise or inflation during a financial year, this is the reason why DA is revised twice a year; once in January and then in July.

Understanding Industrial Dearness Allowance

Industrial Dearness Allowance is an allowance which is applicable to employees working in the public sector. The government of India has recently increased the IDA amount by 5% which has been beneficial for the general level executives, officers and employees of central PSUs.

In the government sector, the Industrial Dearness Allowance is revised quarterly, based on the activeness of the Consumer Price Index (CPI), to compensate for the constantly rising cost of living in India.

Understanding Variable Dearness Allowance

Variable Dearness Allowance is the amount that gets credited to an employee because of revision that happens every six months for those working in central government offices. The part of the money which is compensated after considering the increase or decrease in the Consumer Price Index (CPI) is the Variable Dearness Allowance. As per the Variable Dearness Allowance (VDA), the Dearness Allowance of an employee gets revised and remunerated.

Variable Dearness Allowance is made up of three components:

  • The consumer price index
  • The base index
  • The variable DA amount.

The VDA component remains fixed unless the government of India revises the minimum wage. The base index also stays fixed for a particular period of time. Only the Consumer Price Index or CPI keeps changing every month which in turn changes the overall value of the Variable Dearness Allowance.

The Breakup of Dearness Allowance

Ever since 2006, the Dearness Allowance of employees in the public sector has been growing consistently. The current rate of DA is 50% of the employee’s basic salary. Over the past few years, the DA percentage has been rising due to the rising inflation in India.

The Anticipated DA for Employees working in Central Government Offices as per the 7th Pay Commission effective from January 01, 2017

According to the standard calculation, Consumer Price Index Number for Industrial Workers (CPI-IW), the Dearness Allowance expected for employees appointed to the Central Government offices will be an additional 2% of Basic Salary. The decision has been laid down as per the policy of the Seventh Central Pay Commission which has been effective since January 01, 2017.

In order to determine the increased percentage of Dearness Allowance, with effect from January 01, 2017, for industrial workers the retail inflation between January 01, 2016 and December 31, 2016, will be applied.

Dearness Allowance Rates for Central Government Employees under the 7th Central Pay Commission Policy

  • January 01, 2017: Dearness Allowance Rate increase by 4%.
  • July 01, 2016: Dearness Allowance Rate increase by 2%
  • January 01, 2016: Dearness Allowance Rate difference was 0%.

Defining the Role of Pay Commissions upon Dearness Allowance

The Pay Commissions in India re-evaluate the salary of every employee appointed in the public sector by taking into consideration the different components of the salary. Dearness Allowance is also accounted for in order to officiate the next pay commission report. The Pay Commissions also review and make changes to the multiplication factor as per the mandate.

Revision of Dearness Allowance for Pensioners

When a pay commission rolls out a new salary structure, the pension for retired employees under the public sector are also revised. Likewise, when there is an increase in the Dearness Allowance percentage, the pension of a retired government servant also gets reflected. The policy is applicable to a regular pension as well as a family pension.

Identifying the Difference between DA and HRA

Dearness Allowance is a specified percentage of the employee’s Basic Salary which gets added to the total Basic Salary amount alongside other parts (House Rent Allowance) of the salary to make the total salary.

House Rent Allowance, on the other hand, is a salary component credited by an employer to the employee for compensating the rent expenses of accommodation occupied by the employee. Employees from private or public sector can both claim for HRA.

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