Dearness Allowance (DA) | Finserv MARKETS

What is Dearness Allowance (DA)? Difference Between DA and HRA

15 Dec 2021
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 Dearness allowance can be explained as a specific component of your salary which is directly dependent on the cost of living. In this article, we will explore the meaning of dearness allowance , DA for Central Government employees, types of dearness allowance, and more.

What is Dearness Allowance?

To put Dearness Allowance in simple terms, it is the money given to employees by the Central Government as part of their salary to help with their living expenses. The amount of DA is directly influenced by the cost of living. In other words, the cost of living adjustment allowance given by the Central Government to the employees of the public sector as well as pensioners of the same is known as dearness allowance. The amount of dearness allowance is different for employees as it is based on the location, and hence it varies for employees based in urban areas, semi-urban areas or rural areas.

Dearness Allowance Calculation

Dearness Allowance is calculated to offset the effect of inflation in a given financial year. It is revised twice a year, once in January and the second in July. The dearness allowance calculation formula was changed in the year 2006. Moreover, DA for Central Government employees is calculated differently than that of public sector employees. Let’s have a look at both the formulas:

DA for Central Govt Employees

Dearness allowance % = {(All-India Consumer Price Index average (Base year 2001 =100) for the last 12 months -115.76)/115.76} x 100

DA for Public Sector Employees

Dearness allowance % = {(All-India Consumer Price Index Average (Base year 2001 =100) for the last 3 months - 126.33)/126.33} x 100

Types of Dearness Allowance

Dearness allowance is separated into two different types, namely variable dearness allowance and industrial dearness allowance.

Variable Dearness Allowance (VDA)

DA Central Government comes under the variable dearness allowance. The VDA is revised every six months as per the consumer price index (CPI). This helps in regulating the impact of rising inflation levels. Variable dearness allowance consists of three components- base index, consumer price index and variable DA amount fixed by the Government of India. The base index remains fixed for a particular period. Similarly, the variable DA amount also remains fixed until the government revises basic minimum wages. Only the consumer price index changes every month and impacts the variable dearness allowance.

Industrial Dearness Allowance (IDA)

It is applicable to the public sector employees belonging to the Central Government. The IDA undergoes a quarterly revision depending on the consumer price index. This helps to offset the inflation impact.

How is Dearness Allowance Treated Under Income Tax?

According to the latest updates, dearness allowance is fully taxable for all salaried employees. If the said employees are provided with unfurnished rent-free accommodation where all the prerequisites are met, it becomes that part of the salary up to which the retirement benefit salary of the employee is formed. In India, the dearness allowance component has to be mentioned separately in the Income Tax Return filing.

Pay Commission’s Role in DA Calculation

The pay commission has to evaluate and make changes in the public sector employee’s salary. This is based on the various components of the employee’s salary. Hence, the dearness allowance is also considered by every pay commission when preparing the pay commission report. The commission considers every factor helping with the calculation of salaries including reviewing and changing the multiplication factor of DA calculation.

DA for Pensioners

Every time the pay commission introduces a new salary structure, it gets reflected in the pension of the retired employee of the Central Government. Similarly, when dearness allowance is changed, the pension of retired employees also gets revised. This revision is applicable to both family as well as individual pensions.

Dearness Allowance Hike According to the New Developments Under the Budget

The Government of India offered a huge relief to all the employees and pensioners benefitting from dearness allowance. There are approximately more than 50 lakh Government employees and around 55 lakh retired Central Government employees who are eligible for getting a pension. The DA for Central Government employees was hiked by 2% in the Budget 2018. This means that the DA for Central Government employees now stands at 7% from the previous 5%. This change is going to prove beneficial to all the employees and pensioners who are eligible for DA Central Government.

What is the Difference Between DA and HRA?

Dearness allowance and House Rent Allowance (HRA) are two different components of a salary and there are some major differences between them. The most important difference between DA and HRA is that HRA is applicable to both the public and private sector whereas DA is applicable to only public sector employees. HRA also has certain income tax exemptions that are not applicable to dearness allowance. HRA is a component of your salary which is given for expenses related to the accommodation. On the other hand, dearness allowance is calculated as a specific percentage of your salary to offset the inflation.

Dearness Allowance Merger

Ever since the dearness allowance or DA calculation formula was revised in 2006, DA has been increasing steadily for Central Government employees. Currently, DA for Central Government employees stands at 50% of the basic salary. This is because of the inflation and rising rates of dearness allowance.

According to the rules, dearness allowance has to be merged with the basic salary once it goes beyond the 50% mark. This would mean that the public sector employees would be getting a major salary hike as all other elements of salary are calculated based on the basic salary. There have been demands for dearness allowance merger with basic salary for quite some time now. The government is also expected to announce the decision about the same in the near future.

FAQs

  • ✔️Is dearness allowance applicable to private sector employees?

     No, only the public sector employees are eligible for getting the dearness allowance from the Government.

  • ✔️What is the expected DA from July 2021?

     Dearness allowance was hiked in July 2021. DA for Central Govt employees has been hiked to 31% of the basic salary starting July 1, 2021.

  • ✔️What happens when DA reaches 50?

     When dearness allowance reaches the 50% mark, it is merged with the basic salary. This means that the employees would be getting a major salary hike if that happens.

  • ✔️What is HRA and DA in salary?

     HRA is House Rent Allowance whereas DA is Dearness Allowance. Both are different components of a salary.

  • ✔️Is house rent part of DA?

     No, house rent is different and does not come under DA. House rent comes under the HRA component of your salary.