Dearness Allowance Explained: What Is It and Who Gives It


Dearness allowance is a part of your salary stack which is a fixed percentage of your basic salary. It is intended to help the employee deal with the impact of inflation. Dearness allowance is extended based on the standard of living of the location you are employed at. Hence, the percentage or quantum would vary depending on the location. The DA would be higher for the urban sector vis-à-vis the rural or semi-urban sector.

Dearness allowance means:

Dearness allowance meaning states that it is the adjustment towards cost-of-living which is paid by the government to its employees in the public sector, it is extended to pensioners as well. The Government increased the DA for Central Government employees and employees of autonomous Central bodies with effect from January 2020, the rate became 164% of the basic salary. Subsequently, upon recommendation from the cabinet, the Government, enhanced it further to 189% of basic pay, which was effected from July 2021. DA component is extended to employees in India and Bangladesh. It was first introduced by the Government after the second world war.

As per the dearness allowance meaning, DA becomes the constant enhancement paid by the Government to its employees to help them cope with the increasing cost of living. It is calculated based on inflation of the particular location, there is a standardized means of calculating the % of DA extended. As per the Income Tax Act, 1961, it is mandatory to provide information regarding the tax liability in respect of DA whilst filling your income tax return.  If the DA exceeds 50% of the basic pay of the employee, the DA is merged with the basic salary. This sums up the dearness allowance meaning.

Calculation of dearness allowance:

DA is expressed as a % of the basic salary of the employee. It is a component that protects the employee against the rising prices of household items and the cost of living in general. After the year 2006, the calculation of DA % was changed, the calculation applicable is as below:

For Central Government employees: ((Average of AICPI (Base Year 2001=100) for the past 12 months -115.76)/115.76) *100

For Central public sector employees: ((Average of AICPI (Base Year 2001=100) for the past 3 months -126.33)/126.33) *100

AICPI is the acronym for All the Indian Consumer Price Index

DA is extended to fend price rise specific to a particular year, hence it is revised 2 times every year. The revisions are done in January and July every year.

Types of Dearness Allowances:

The Indian Government offers 2 types of DA to its employees:

  1. Industrial Dearness Allowance:
    It is the allowance paid by the Government to the public sector employees. There is a quarterly revision of the rate of industrial DA applied by the Government to the CPI (Consumer price index).
  2. Variable Dearness Allowance:
    This type of DA is provided to Central Government employees. Unlike the Industrial DA, this type of DA is revised once in 6 months. There are 3 components to compute the variable dearness allowance – CPI, Variable % of DA, and base index. The variable % of DA remains at the same level until the basic minimum wage is revised (on either side) by the Government.  Similarly, the base index is held constant unless there is a need to shift the base index due to drastic changes in the prices of commodities and consumer products.

 Taxability of Dearness Allowance:

DA is a taxable item that forms an integral part of the salary stack, it is a taxable component in the hands of the recipient, the employee. The employee must indicate the tax liability concerning the DA at the time of ITR filing. In the event the employee is extended with an unfurnished accommodation by the employer, in this case, Central Government, then the DA will form a part of the retirement benefit salary that will be extended to employees post-retirement.

DA for pensioners:

A pensioner is one who was employed with the Central Government earlier and has retired now. He will continue to receive a pension from the employer. The dependent family members of retired Central Government employees may also receive a pension after the death of the retired employee. DA continues to be paid to the retired employee as they continue to fend for the increasing costs. The pay commission or Central Government revises the DA rates, the same reflects in the pension amount.

After learning the dearness allowance meaning, it is clear that DA is a very empathetic step by the Government to help the employees cope with the macroeconomic factor, especially inflation which has a telling effect on everyone’s household budget. It is important to be aware of your salary and the components within your salary which will help you make informed decisions.

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