Dearness Allowance (DA) With Example

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India has been experimenting with numerous measures to curb the rising inflation due to which the price
of almost all commodities have increased. Most severely hit commodity is food and this has a direct
impact on the economy. Considering the fact that inflation is due to market movement, the government
can take measures only to a certain extent, to curb it. But since it has an impact on citizens everyday
lives and needed to be shielded from the negative effect of rising prices, Dearness allowance or DA
becomes a key player with an important role to play.

Page Contents

1. What is Dearness Allowance?

2. How to Calculate Dearness Allowance?
3. What is Industrial Dearness Allowance?
4. Variable Dearness Allowance
5. Dearness Allowance Merger
6. Role of Pay commissions in modifying DA
7. Dearness Allowance for Pensioners
8. Difference Between DA and HRA
9. News About Dearness Allowance

Salary paid by employers to their employees in the public sector is divided into various components. One
of these is the Dearness Allowance. The concept of Dearness Allowance or DA was introduced after
World War II and was initially known as Dear Food Allowance. In the beginning, Dearness Allowance was
provided by the government to employees due to a demand for wage revision. However, it was later
linked to the Consumer Price Index. A number of committees in the Central Government have been
revising and restructuring the percentage of Dearness Allowance.

In a country like India, Payment of DA becomes even more significant owing to the subdivision of various
Indian states into cities, towns and villages. The DA component takes care of the change in the cost of
living depending upon the location of the employee. Specially, for government sector employees, job
transfers are an essential feature and hence DA becomes even more significant in order to hedge the
inflation cost of living difference as well as inflation.

What is Dearness Allowance?

Dearness Allowance is cost of living adjustment allowance which the government pays to the employees
of the public sector as well as pensioners of the same. DA component of the salary is applicable to both
employees in India and Bangladesh.

Dearness Allowance can be basically understood as a component of salary which is some fixed
percentage of the basic salary, aimed at hedging the impact of inflation. Since, DA is directly related to
the cost of living, the DA component is different for different employees based on their location. This
means DA is different for employees in the urban sector, semi-urban sector or the rural sector.

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Dearness Allowance under Income Tax and Exemption Limit Chart

As per Assessment Year 2017-18, Dearness Allowance is completely taxable for individuals who are
salaried employees. In case employees are provided with rent free accommodation that is unfurnished
wherein all prerequisites are met, Dearness allowance is a part of the salary to the extent wherein it
forms a part of the retirement benefit salary.

The Income Tax Act mandates that tax liability for Dearness allowance will have to be declared in the filed
returns.

How to Calculate Dearness Allowance?

After the Second World War, DA component was introduced by the government. After 2006, the formula
for calculating dearness allowance has changed and currently DA is calculated as follows,

For Central Government employees:

Dearness Allowance % = ((Average of AICPI (Base Year 2001=100) for the past 12 months -
115.76)/115.76)*100

For Central public sector employees:

Dearness Allowance % = ((Average of AICPI (Base Year 2001=100) for the past 3 months -
126.33)/126.33)*100

Where, AICPI stands for All-India Consumer Price Index.

From the year 1996, DA has been included to compensate for price rise or inflation in a particular
financial year and hence it is revised twice every year, once in January and then in July.

What is Industrial Dearness Allowance?

Industrial dearness allowance or IDA is the allowance applicable to employees of the public sector
enterprises. Recently, the government of the India has increased IDA by 5% for this sector. This decision is
set to benefit all board level executives, officers and employees of central PSUs.

IDA for government sector enterprises is revised quarterly based on the movement of the Consumer
Price Index (CPI) in order to compensate for the rising inflation in the country.

Variable Dearness Allowance:

VAD or Variable dearness allowance is the allowance that comes as a result of revision every six months
for central government employees. The changed new figure that is received as a result of taking into
consideration the increase or decrease in the Consumer Price Index, CPI, is termed as Variable dearness
allowance. Based on this figure, the DA of employees is revised and rolled out.

There are three components that make up VAD. First is the consumer price index, second, the base index
and third is the variable DA amount fixed by the government of India. The third component remains fixed
until the government revises the minimum wages. Same way, base index also remains fixed for a
particular period. Only the CPI or Consumer Price Index changes every month and affects the overall
value of the variable dearness allowance.

Dearness Allowance Merger:

Since the year 2006, the dearness allowance for employees from the public sector has been continuously
growing. The figure currently stands at 50% of the basic salary. This has happened over a number of years
during which the DA percentage rose steadily in order to hedge the rising inflation.

As a rule, it is practice to merge the DA with the basic salary once the DA percentage breaches the 50%
mark. This is supposed to be a great salary booster for employees since all other components of the
salary are calculated as a percentage of the basic salary. Demands for merging the DA with the basic
salary have been with the government for quite some time. The union cabinet is expected to take a
decision on this matter soon. In the meantime, employees from the public sector are ecstatic with
anticipation of a merged DA which would mean a major hike in their salaries.

Role of Pay commissions in modifying DA:

Every subsequent pay commission in India is expected to revaluate the salary of employees of the public
sector taking into account the various components of salary. Dearness Allowance too, is taken into
account for rolling out the next pay commission report. Pay commissions take into account all the factors
that feed into the calculation of salaries of personnel in the public sector. Reviewing and changing the
multiplication factor also comes under the purview of the pay commissions.

Dearness Allowance for Pensioners:

Every time a new salary structure is rolled out by a pay commission, the pension for retired employees of
the public sector is also revised. Same is the case with Dearness Allowance; every time DA is increased by
a certain percentage, the same change gets reflected in the pensions of retired public sector employees.
This applies to both regular pension as well as family pension.

Difference Between DA and HRA?

DA or dearness allowance is calculated as a specific percentage of the basic salary which is then added to
the basic salary along with other components like HRA (House Rent Allowance) to make up the total
salary of an employee of the government sector.

HRA or House Rent Allowance is the salary component given by an employer to an employee in order to
meet expenses related to the renting of accommodation which the employee takes for residential
purposes. HRA is applicable to both employees from the private sector as well as the public sector
whereas DA is majorly applicable to employees working in the public sector.