Dearness Allowance (DA) - Meaning, Types, and DA Calculation

A DA or its full form, Dearness Allowance, is an additional salary component the government pays to the public sector pensioners and employees. The additional salary component is set in structure to help individuals in adjusting the rising cost of living due to inflation.

DA is generally based on the cost of living; hence, the salary component of it can vary. The DA percentage for one public sector employee to another can vary depending on their job location.

The DA percentage in salary is different for urban, semi-urban and rural employees. The DA rates usually get revised periodically based on the inflation rate. Many private companies in India also offered dearness allowance as a statutory requirement.

Dearness allowance plays a significant role in salary structure by adjusting the cost of living and assisting employees in managing inflation.

• Some of the reasons to prove the importance of DA percentage in salary structure are listed below.

• The DA offers financial stability to individuals by protecting their purchasing power against inflation.

• The DA offers retirement benefits to pensioners by offering a reasonable post-retirement life by impacting the pension amount.

• Lastly, the DA offers an added advantage to employees by boosting their morale with respect to salary, keeping in mind the current economic situation.

Depending on the basis of calculation, frequency, percentage, etc, dearness allowance is different from other allowances. Refer to the table below to learn about the difference between DA and other allowances.

The Dearness allowance was first introduced after World War II by the government. These rules were ultimately implemented in 1972 after a few revisions. Additionally, service officers covered by the All India Service Act, 1951 are entitled to a dearness allowance as a portion of their basic salaries.

A person should be currently or formerly (retired) employed by one of the three governments, India, Pakistan or Bangladesh, to be eligible for a dearness allowance.

People who work in the public sector are also eligible. Others who are eligible include:

Service members qualify for DA under the All India Service Act 1951. However, they must be paid a base, fixed salary.

All eligible employees get a percentage of DA in accordance with the All India Service (DA) Rules, 1972. The amount relies on the base pay, but the percentage is the same for everyone.

Housing rent that officers have to pay is included in their dearness allowance. The dearness allowance rate determined by the Pay Commission is currently 125%.

Pensioners are also eligible for DA payments but will be excluded if they find re-employment within a state, federal, local, or other governmental agency.

The DA for bank employees is based on CPI points. The current DA percentage sits at 41.16% from February to April 2023.

Dearness allowances are classified into two types which are:

Variable Dearness Allowance (VAD) - VAD is an allowance offered to central government employees. This DA gets revised every six months. The modification in VAD is due to a change in the consumer price index(CPI), which leads to a revised DA for employees. There are basically three components of variable dearness allowance.

Consumer Price Index - It changes every month and affects the value of VAD.

Base Index - The base index remains fixed for a specified time duration.

Variable DA Amount - It is the component that remains fixed until the government decreases or increases the minimum wage.

Industrial Dearness Allowance (IDA) - IDA is offered to public sector employees in India. The IDA for government sector employees gets revised or modified quarterly based on the consumer price index(CPI) to combat inflation. The rate of IDA is applied to all public enterprise employees, including top officers, managers, members, etc.

The Indian government set up the Pay Commission to assess and update the salaries of central government and public sector employees on a regular basis. All the components that form an employee's total salary are considered when making these revisions.

The Pay Commission is fully responsible for salary revisions when considering these components. They also calculate the multiplication factor or fitment factor from time to time.

There are various factors pay commission asses while doing the DA calculation, such as:

Evaluation Economic Situation -While doing the DA calculation, the pay commission assesses the economic situation, such as cost of living, inflation, etc.

Recommend DA Rates -After doing the current economic situation evaluation, they recommend the DA rates so that they align with the current economic situation.

Periodic Reviews - Based on the changing economic landscape, pay commissions suggest modification in DA calculation every 10 years.

Impact on Budget - SInce DA is directly linked with pensioners and employees, the recommendation or suggestion also affects the government budget allocations.

The 7th Pay Commission

The central government established the 7th Pay Commission on 8th February 2014. They create a Pay Allowance every ten years to update their employees' pay scale and to preserve their living standards. So, employees of central government offices are eligible for benefits under DA.

Remember that the DA rate can change due to various living circumstances and expenses between rural and urban areas.

Former central government employees receiving pensions are qualified to get a dearness allowance and benefits.

The government also suggests that its employees get a DA rate equal to 125% under the 6th Central Pay Commission (CPC).

As of now, the dearness allowance by the central government sits at 46%. However, it is speculated that the DA rate will be increased by 4% in upcoming months, making a total of 50%.

These rates are also subject to change twice a year. The central government increases this allowance every six months. So the changes would be introduced on 1st January, in the first half from January to June, and on 1st July from July to December.

These are the current formulae to calculate dearness allowance rates after the changes implemented in 2006. Working government employees would have their fixed basic salaries under these consultations:**
For Central Government Employees:

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

For Public Sector Undertaking (PSU) Employees:

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

Note: AICPI - All-India Consumer Price Index.

For example, if a central government employee's base salary is ₹23,500 per month. At 38%, his dearness allowance would be ₹8,930. After the 4% hike, at 42%, his dearness allowance will be ₹9,870. So their salary would have been raised by ₹940 in accordance with the 4% hike for a pensioner with a basic pension of ₹40,100 per month. At 38%, the dearness allowance would be ₹15,238. With the 4% hike, the DA amount increases to ₹16,842 every month. So his pension will be increased by ₹1,604 per month at 42%.

The 7th Pay Commission has also increased the minimum wage for government employees from ₹18,000 to ₹26,000 for entry-level wages after the presentation of the Union Budget 2023.

This is in accordance with the 4% hike in DA rates and the demand from government employees to raise the fitment factor (a multiplication number multiplied by the basic pay) to 3.68 from 2.57.

The base pay initially sat at ₹7,000; with the 7th Pay Commission recommending a common fitment benefit of 2.57, that base pay was raised (2.57 times the basic pay of the 6th Pay Commission) to the current ₹18,000.

With a 3.68 fitment factor, the base pay of ₹18,000 will be increased to ₹26,000.

Furthermore, with the introduction of the 7th Pay Commission, a new class-1 officer's base pay will sit at ₹56,100.

So, a class-1 officer will be paid three times more than an entry-level employee as their wage structure displays a compression ratio of 1:3:12.

Whenever the Pay Commission introduces a new salary structure, it is reflected in the pension payments of retired government employees. So when the dearness allowance is changed, the pensions for retired employees also get revised. This change/revision is applicable for both family pensions and individual pensions.

Pensioners having chronic conditions can also consider applying for health insurance policies or critical illness insurance if they are worried about rising inflation rates and medical expenses. A health insurance plan paired with a DA should ease any worries you may have about prematurely depleting your savings.

If pensioners are re-employed, they may not get a dearness allowance if it's given on a fixed pay or time scale. However, re-employed pensioners might get a dearness allowance that is limited to their last drawn pay.

Note that dearness allowance is not paid to pensioners residing outside of India if they are re-employed. Pensioners who reside abroad without re-employment, however, do qualify for DAs on their pensions.

Ever since the changes made in 2006 to the DA calculations, the dearness allowance rate has been steadily increasing for central government employees. Currently, that percentage for central government employees sits at 50% of their basic salary. This is a direct result of inflation and rising dearness rates.

According to the rules, if the dearness rate goes beyond 50%, it has to be merged with the basic salary. This means that public sector employees would get a massive salary hike as other elements of the salary are also calculated on the base salary.

There has been an increasing demand for a dearness allowance merger in recent times as well. The government is expected to announce their verdict on this subject in the near future.

Remember that DA and HRS are different. They are both included as a part of an employee's salary and exist as separate parts of the salary structure.

As we've mentioned before, yes, this amount is fully taxable under the Income Tax Act of 1961, under Section 17(1). When filing their tax returns, employees must declare a tax liability regarding their DA separately.

Suppose employees are provided with rent-free, unfurnished accommodation where all the prerequisites are met. In that case, it becomes a part of the salary up to which it forms the retirement benefit salary of the employee.

Having a health insurance plan, however, does make you eligible for tax exemptions under Section 80D of the Income Tax Act.

A dearness allowance was introduced primarily to combat the effects of inflation and to maintain employees' standard of living. It's an amount the government pays as a percentage of an employee's or pensioner's basic monthly salary.

The Pay Commission set up by the central government of India calculates this percentage and is revised regularly. These revisions are also applied to pensioners. While there are no tax exemptions for a dearness allowance, they do exist for health insurance plans.

Other benefits of health insurance plans include, financial protections, top-notch medical care, etc

Tata AIG also provides critical illness insurance plans for the benefit of securing you against the impact of critical illnesses. So, government employees with chronic conditions can take advantage of the financial aid they get from both a medical insurance plan and a dearness allowance.