Every individual employed with public sector undertakings is paid dearness allowance as a part of their salary. This allowance is given to manage the cost of living expenses of the employees. But what are the criteria on which dearness allowance amount is received and is it taxable or exempt? Read this article to know more about dearness allowance.

What is Dearness Allowance?

The government pays Dearness Allowance to its employees and pensioners as a cost of living adjustment to offset the impact of inflation. The effective salary of government employees requires constant enhancement to help them cope with increasing prices.

Dearness allowance is calculated as a percentage of basic salary. Thus, dearness allowance varies from employee to employee depending on their basic pay. It is mandatory for employees receiving dearness allowance to declare it as a part of their salary. Dearness allowance is fully taxable. 

Latest Changes in DA

The Dearness Allowance (DA) for central government employees has recently been hiked by to 55% from the previous rate of 53%. This increase is effective January 1, 2025. 

Additionally, Dearness Relief (DR) for central government pensioners has also risen by 4% to reach 50%. 

Let’s break down how this change impacts the take-home salary of central government employees using an example: Suppose a central government employee has a basic salary of Rs 45,700 per month. Previously, at a DA rate of 53%, their dearness allowance was Rs 24,221. With the new DA rate of 55%, their dearness allowance will increase to Rs 25,135. This means they will receive an additional Rs. 914 in their salary (Rs 25,135 - Rs 24,221). 

These adjustments help central government employees keep up with the rising cost of living. In summary, central government employees can expect a significant boost in take-home salary due to the recent DA hike.

Calculation of Dearness Allowance(DA)

As DA is provided to employees to protect against the price rise in a particular financial year, it is calculated twice every year – in January and July. The formula to calculate the dearness allowance was changed in 2006 by the Government. Presently, DA is calculated as per the following formula:

For Central Government Employees

For Public Sector Employees

Here, AICPI means the All-India Consumer Price Index.

Treatment of Dearness Allowance under Income Tax

Dearness Allowance 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.

Types of Dearness Allowance

For calculation, DA is divided into two separate categories: Industrial Dearness Allowance and Variable Dearness Allowance.

Industrial Dearness Allowance (IDA) applies to the Public sector employees of the Central Government. The Industrial Dearness Allowance for public sector employees undergoes quarterly revision depending on the Consumer Price Index (CPI) 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.
• The variable DA amount that has been fixed by the Government remains fixed unless the government revises the basic minimum wages.

Role of Pay Commissions in the Calculation of Dearness Allowance

The 7th Pay Commission must evaluate and change the salaries of public sector employees based on the various components that make up the final salary of an employee. Therefore, DA is also considered by the Pay Commissions while preparing the subsequent pay commission report.

The pay commissions are responsible for considering every factor that helps calculate salaries. This also includes periodic reviewing and updating of the multiplication factor for calculating DA.

Dearness Allowance for Pensioners

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. 

Difference Between DA and HRA

Dearness Allowance must not be confused with the HRA as they are two separate components and are treated differently for income tax. One significant difference is that HRA applies to both private and public sector employees, while only public sector employees are entitled to DA. Additionally, there are certain Tax exemptions applicable to HRA which are not available for the DA.

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 55% of the basic salary, effective January 2025. This has been a result of the constant enhancement in the DA biannually to offset the adverse effects of inflation. As per the rules, it is a practice to merge the DA with the basic salary when it crosses the level of 55%. 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.

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