Dearness Allowance

Dearness allowance is a component or aspect of the salary that government employees or government pensioners earn in India. The Indian government highly values government employees as they contribute to the operational and development activities run by the government through their undertakings and departments. Dearness allowance is a benefit that is added to their salaries or pensions so that they can effectively tackle rising inflation and have adequate funds to cover present or future expenses. If you are a government employee or are looking to get a government job, it is important that you understand one of the most crucial components of your salary structure—the dearness allowance.

This article will help you understand the dearness allowance’s meaning and how it affects the overall salary structure of a government employee or pensioner.

What is dearness allowance?

Dearness allowance’s meaning refers to a component of salary paid by the government to its public employees and pensioners in India. The main aim of adding dearness allowance to the salary of government employees and pensioners is to help them mitigate the negative effects of the ever-rising inflation. Inflation refers to the rate at which the general level of prices increases for goods and services, diminishing purchasing power. It reflects the decrease in the purchasing value of money. Since inflation is a basic aspect of economies worldwide, it can force employees to lower their standard of living. Hence, the government introduced a dearness allowance to help government employees and pensioners comfortably cover their cost of living, irrespective of the inflation rate.

Since the dearness allowance is attached to the cost of living, it is not fixed and is different for almost every government employee and pensioner based on their residence location. Furthermore, DA has a different amount for government employees and pensioners residing in urban, rural, and semi-urban areas.

Since the inflation rate and cost of living are dynamic and keep changing, the government also reviews and changes the dearness allowance every six months. Usually, the government announces the first change on January 1st every year for the period of January-June and on July 1st for the period between July-December.

Latest changes in DA

The Indian government’s Department of Personnel and Training issued a circular on July 4, 2024, announcing an increase in the dearness allowance (DA). The DA has been increased by 4% to 50% from the previous rate of 46%. As per the circular, the increase is effective from January 1, 2024. Furthermore, it has also hiked the Dearness Relief (DR) for central government pensioners by 4% to 50%.

As per the 7th Pay Commission recommendations, other components and allowances included in the salaries of central government employees and pensioners will also increase by 25%. This is because of the DA hitting the ceiling of 50%. These allowances include:

• Tough location allowance

• Conveyance allowance

• Special allowance for kids of women with disabilities

• Children education allowance

• House rent allowance

• Dress allowance

• Split duty allowance

• Deputation (duty) allowance

• Special allowance for childcare

• Gratuity ceiling

• Hostel subsidy

• Daily allowance

• TA allowance

• Mileage allowance

Calculation of dearness allowance (DA)

The Indian government amended the methods used for the dearness allowance calculation in 2006, and since then, these two methods have been used for dearness allowance calculation:

• Dearness allowance for central government employees formula: ((Average of All-India Consumer Price Index (with the base year 2001 = 100) for the past 12 months – 115.76) / 115.76) * 100

• Dearness allowance for central public sector employees formula: ((Average of All-India Consumer Price Index (with the base year 2001 = 100) for the past 3 months – 126.33) / 126.33) * 100

• Pay commission and the dearness allowance: The Indian Pay Commission is responsible for re-evaluating government employees' salaries by considering all the salary components. The Commission also re-evaluates the dearness allowance before submitting its report, which contains a detailed review and analysis of all the salary components, including the dearness allowance. The Pay Commission also evaluates the multiplication factor used for dearness allowance calculation.

• Dearness allowance and pensioners: Retired government pensioners also benefit when the government hikes the dearness allowance. With every hike, the pension of retired government employees also increases, helping them receive a higher amount every month until the DA is hiked again. This ensures they have adequate funds to tackle rising inflation at a time when they don’t have a primary source of income.

Treatment of dearness allowance under Income Tax

Every taxpayer has to file taxes based on the applicable income tax slabs. These slabs are applicable depending on the total salary (including dearness allowance) earned by a government employee or pension earned by a government pensioner. As far as dearness allowance is concerned, the amount received by government employees and pensioners is entirely taxable in their hands. This means that the dearness allowance component, which is already added to the salary amount, is included in the overall taxable income of the government employee or pensioner. However, the taxpayer must mention the dearness allowance amount separately in the Income Tax Return form while filing taxes.

Furthermore, if an employee is provided with unfurnished rent-free accommodation, the value of this benefit is considered part of the salary for calculating retirement benefits. This inclusion is subject to certain conditions, such as the accommodation being necessary for the performance of the employee's duties and provided by the employer under specific regulations.

Types of dearness allowance

Here are the types of dearness allowance provided by the Indian government to government employees and pensioners:

Industrial dearness allowance (IDA)

Industrial dearness allowance is added to the salary of public sector employees of the central government. The industrial dearness allowance is revised quarterly based on the Consumer Price Index (CPI) to account for inflation. This adjustment helps maintain the purchasing power of employees working in various public sector industries.

Variable dearness allowance (VDA)

Variable dearness allowance is added to the salary of central government employees. Unlike industrial dearness allowance, it is revised two times a year, first in January and next in July, based on the changes in the Consumer Price Index (CPI). VDA is based on three components:

• The base index, which remains fixed for a specific period.

• Consumer Price Index, which changes every month.

• The variable dearness allowance, which remains fixed unless revised by the government.

Role of pay commissions in the calculation of dearness allowance

The 7th Pay Commission is the supreme authority responsible for changing the salary structure of government employees and the pension structure of government pensioners. The commission reviews and analyses every single salary component and the current Consumer Price Index (CPI) to change the salary structure to ensure that it is at par with tackling the current inflation. Within the process, the commission also considers the dearness allowance and makes changes accordingly. Afterwards, it releases a pay commission report that includes every aspect of the salary structure and the changes made by the commission. Furthermore, it also considers, reviews, and updates the multiplication factor used for dearness allowance calculation.

Dearness allowance for pensioners

Similar to government employees, changes in the dearness allowance also directly affect government pensioners. As per Government regulations, either the employee or a family member (after the employee’s death) is eligible for a higher DA after revision. Every time the dearness allowance is changed by the government, resulting in salary structure changes, the pension structure also changes for a government pensioner.

However, government pensioners are not generally allowed to earn pensions if they are re-employed, but sometimes they can get DA after being re-employed based on their last drawn salary. If government pensioners have relocated to a foreign country due to re-employment, they do not get DA. The only time they get DA in a foreign country is if they have not been re-employed.

For deeper insights, here are additional articles that are closely aligned with your interests:

• What is the meaning of closet indexing

• What is deferred compensation

• What are marketable securities

• What is real value

• What is a private investment

Difference between DA and HRA

Dearness Allowance (DA) and House Rent Allowance (HRA) are components of an employee's salary designed to address different needs. Here is the difference between DA and HRA:

• Purpose: Dearness allowance is given to compensate for rising inflation so that government employees and pensioners can maintain their purchasing power irrespective of the rising cost of living. House rent allowance, on the other hand, provides financial assistance for housing, helping employees manage rental expenses.

• Calculation: Dearness allowance is calculated as a percentage of the basic salary and adjusted periodically based on the Consumer Price Index (CPI). In contrast, HRA is calculated as a percentage of the basic salary, but its amount can vary depending on the employee’s city of residence.

• Taxation: The dearness allowance amount is fully taxable in the hands of the employees. However, employees can claim a tax deduction for HRA under section 10(13A) of the Income Tax Act if certain conditions are fulfilled.

Dearness allowance merger

According to government rules and regulations, the basic salary of government employees must be merged with the dearness allowance once the DA reaches the ceiling of 50%. The merger is targeted towards boosting the final salary amount of government employees, as all the other salary components and allowances are calculated as a percentage of the basic salary. Although the Indian government has received the request to merge basic salary with DA, the final decision is still pending.

Conclusion

Dearness allowance is one of the most beneficial additions to the salaries of government employees and the pensions of government pensioners. The addition of DA significantly increases the overall pay of government employees and pensioners, allowing them to curb the negative effects of rising inflation and maintain their purchasing power even if the cost of living increases. The Pay Commission periodically revises the dearness allowance to ensure that the salary structure remains ideal. Since the current dearness allowance rate has hit 50%, it is a matter of time before the basic pay will be merged with the DA, significantly increasing the amount of other salary components and allowances. Now that you know the dearness allowance meaning, you are better equipped to manage your salary structure as a government employee or pensioner.

If you are considering investing in mutual funds, look no further than the Bajaj Finserv Platform. It is designed with unique investing tools, such as a mutual fund calculator that can help you compare mutual funds and invest in the most suitable mutual fund schemes.

Essential tools for all mutual fund investors

Lumpsum Calculator	Step Up SIP Calculator	Systematic Investment Plan Calculator	Canara Robeco SIP Calculator
SBI SIP Calculator	HDFC SIP Calculator	Nippon India SIP Calculator	Axis Bank SIP Calculator