What Is Dearness Allowance? Everything You Need To Know About It

Dearness allowance is a component of Salary which is a fixed part of the basic pay or basic salary. Dearness allowance or DA can be varied from one location to another location based on the employee’s work zone. Today we will talk about the details of the Dearness allowance.

To make out the details of the Dearness allowance, you need to know the definitions of the Dearness allowance. Go through the article to get a sharp knowledge on dearness allowance and what it is.

What is a Dearness Allowance?

Dearness allowance is a cost of living adjustment allowance which is paid by the government to the employees of the government sector and the pension holders of the government sectors. 

Calculation of Dearness Allowance

To calculate dearness allowance, there are some formulas. After world war ii, dearness allowance was commenced to the employees by the government in India. At that time it was known as the “Dear Food Allowance”. That time it was added to the employee’s salary for wage revision.

After 2006, the dearness allowance calculation was changed based on that current salary system which is dependent on the Consumer Price Index (with base index 1960 = 100).

Nowadays the dearness allowance is calculated as follows:

The Central Government Employees

Dearness Allowance % is calculated for the central government employees as follows:
((Average of AICPI (Base Year 2001=100) for the past 12 months -115.76)/115.76)*100

The Central Public Sector Employees

Dearness allowance % is calculated for the central public sector employees as follows:
((Average of AICPI (Base Year 2001=100) for the past 3 months -126.33)/126.33)*100

Here one thing should be mentioned that AICPI stands for All India Consumer Price Index. From the year 1996, dearness allowance has been revised two times every single year. Once it’s done in January and the other is in July.

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Types of the Dearness Allowance

There are some differences in calculating the dearness allowance. Based on two different categories of calculation of the dearness allowance, there are two types of Dearness allowance. They are as follows:

• Industrial Dearness Allowance
• Variable Dearness Allowance

Industrial Dearness Allowance

Industrial dearness allowance or IDA is considered only in the case of employees of public sector enterprises. Industrial Dearness Allowance has been increased by 5% recently by the government.

This decision of increasing the allowance is accepted for all the board-level executives, officers, and employees of central PSUs. There is some variation and revision of this dearness allowance.

IDA for the government sector enterprises has been reviewed quarterly because this Allowance is dependent on the movement of the Consumer Price Index (CPI) to compensate for the rising inflation across the country.

Variable Dearness Allowance

Variable Dearness Allowance or the VDA is revised every six months which means twice a year. This dearness allowance is specifically for all central government employees. This Allowance is dependent on the Consumer Price Index, CPI. This figure is considered based on the up and down of CPI and after the consideration, it is revised and rolled out. 

There are three specific key factors in variable Dearness allowance. The first one is the Consumer price index. The second one is the base index. The third one is the variable Dearness Allowance amount which is mentioned by the Indian government in prior.

This third key factor is revised only if the Indian government takes the decision to increase it or not. The base index is also quite fixed for a specific time frame. When it comes to CPI, it changes every month. That’s why CPI is the main component that can cause the change in overall dearness allowance.

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How is the DA Treated Under Income Tax?

Dearness allowance comes under income taxation. Each and everyone who is a salaried employee, or is bound to pay the income tax. 

Role of Pay Commissions in the DA Calculation

Every time it comes time for a pay commission in India, it is definite that the salary of employees of the public sector will be reevaluated taking all the factors into account. This is the same in the case of dearness allowance.

Dearness allowance is also taken into account and rolled to the next pay commission report and assessment. Reviewing, replacing, and changing the multiplication factor too comes under the horizon of the pay commissions.

Dearness Allowance for Pension holders

Whenever a new pay commission report is published, pensions for the retired employees are also revised as per the new report. When a dearness allowance increases, that reflects on the pension also. Pension also increases as per the dearness allowance percentage.

Conclusion

Hope you have understood the details of the dearness allowance. This article will help you with the minute details that you need to know about the dearness allowance paid by the government to the employees.

Frequently Asked Questions (FAQs)