Whether you work in the private or public sector in India, benefits and allowances comprise a significant portion of your take-home pay. This is primarily intended to lower the taxability of income. Your basic pay is determined by the applicable pay scale, and then allowances and other components are added to determine your total wage. One such allowance for public sector employees is the DA or Dearness Allowance.
If you are a new employee in the public sector or simply seeking information on the dearness allowance, you have come to the correct spot. This article explains everything from the definition of dearness allowance to the DA percentage for central government employees in India.
What Is Dearness Allowance?
A DA is a predetermined percentage of your base pay that is added to your total compensation. The DA is intended to counteract inflation in the cost of living and varies from employee to employee depending on location. In India, if you are in a Tier I city, your dearness allowance will be significantly larger than if you are in a Tier II city. In other words, it is a cost-of-living adjustment paid to public sector and central government employees in India, both active and retired.
Even though the DA accounts for the cost of living, it is distinct from a housing rent allowance (HRA). The two components of your income are distinct and, as such, have distinct income tax implications and exemptions. Moreover, both private and public sector employees receive an HRA, whereas only public sector employees are eligible for DA.
History of Dearness Allowance
The Dearness Allowance was once called as the “Dear Food Allowance” when it was created after World War II. Also created in 1947 was the “Old Textile Allowance,” which was updated and reintroduced in 1953 as the “Revised Textile Allowance.” Initially, DA was granted in response to employee requests for a salary increase. It was later linked to the Consumer Price Index. Various committees have been formed in the past to examine the subject of D.A. payments to Central Government employees.
- The Third Central Pay Commission suggested the payment of DA anytime the CPI increased by 8 points above the index of 200 (with 1960 as the basis). With effect from 1.1.1973, the extent of neutralization ranged from 100 to 35%.
- The IV Central Wage Commission suggested granting DA according to a “percentage scheme” of the basic pay (1986). It also recommended that DA be paid twice annually, on January 1 and July 1. Each instalment of DA was to be determined using the percentage increase in the 12-month moving average of the All India Consumer Price Index (base 1960). Currently, the level of neutralization ranges from 100 to 65 per cent.
- The Fifth Central Pay Commission investigated the issue of differential neutralization and determined that it was unfair to top officers. As a result, uniform neutralization of 100% was proposed for all employees. The Commission recommended that the dearness allowance be changed to dearness pay whenever the cost of living increases by more than 50 per cent above the base level.
- The VI Central Pay Commission suggested that the base year of the Consumer Price Index (CPI) be updated as often as possible. In addition, the base year for calculating DAs was adjusted to 2001 (the base year 2001 = 100).
Calculation Of Dearness Allowance
The Central Government altered the calculating formula for dearness allowance after 2006. The calculation for central government employees, public sector employees, and pensioners is as follows.
- Central Government Employees
Dearness Allowance % = ((Average of AICPI (Base Year 2001=100) for the previous twelve months - 115.76)/115.76) *100
- Public Sector Employees
Dearness Allowance% = ((Average AICPI (Base Year 2001=100) for the previous three months -126.33)/126.33) *100
- Pensioners
Every time the pay commission implements a new compensation structure, the pension amount for retired public-sector personnel is also altered. Similarly, every time the dearness allowance is increased, the pension amount of retirees adjusts accordingly. This modification applies to both regular pensions and family pensions.
Current DA Rate
As DA is based on the cost of living, this component of pay is not fixed. It varies depending on the employee’s location in the public sector. Consequently, DA allowance differs for rural, urban, and semi-urban employees. The DA rate is subject to change twice annually. The government raises this allowance every six months. Typically, the adjustment is implemented on January 1 for the period between January and June, and on July 1 for the remainder of the year.
Types of Dearness Allowance
DA is divided into two distinct categories for calculation purposes: industrial dearness allowance and variable dearness allowance.
- Industrial Dearness Allowance (IDA) applies to Central Government public sector employees. Quarterly adjustments are made to the Industrial Dearness Allowance for public sector employees based on the Consumer Price Index to assist mitigate the effects of rising levels of inflation.
- Variable Dearness Allowance (VDA) applies to Central Government employees. It is changed every six months in accordance with the Consumer Price Index in order to counteract the effects of growing inflation. VDA is dependent on three distinct components, as described below.
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- Base Index – remains constant for a specific period.
- Consumer Price Index – influences VDA as it fluctuates monthly.
- The government-set variable DA amount remains unchanged unless the government revises the basic minimum wage.
What Is CPI?
CPI, or the consumer price index, is a metric used to measure inflation. CPI is a measure of retail inflation that gathers information on the prices of goods and services consumed by the retail population. An increase in the price level of a specified basket of goods and services over a specific time period is the definition of the CPI. It is a macroeconomic indicator used to calculate inflation. It is deployed by the central and state governments, as well as the Reserve Bank of India, to maintain a stable money supply and price level.
How is DA Treated Under Income Tax Act?
According to the most recent information, DA is entirely taxed for salaried personnel. If the employee has been given rent-free housing that is unfurnished, it becomes that portion of the income up to which it comprises the employee’s retirement benefit salary, assuming all other prerequisites are met. In India, the Income Tax regulations stipulate that the dearness allowance component must be listed separately on tax returns.
Difference Between DA And HRA
| Dearness Allowance | House Rent Allowance |
| Public sector employees including central and state government employees are eligible | Public as well as private sector employees are eligible. However, it is not a mandatory allowance. |
| Its objective is to compensate for the rising cost of inflation for the employees. | Its objective is to compensate for the rental accommodation requirement of the employee. |
| DA is calculated as the percentage of the basic salary. | House Rent Allowance is a fixed component forming part of the salary separately. |
| Taxable as per individual slab rate | Taxable in the employee’s hands. Every taxpayer is eligible for a tax exemption based on where they live. In addition, the basic income and dearness allowance are considered while calculating HRA exemption. |
Role of Pay Commissions In DA Calculation
The pay commission must examine and adjust the salaries of public sector employees based on the many components that comprise an employee’s total compensation. Consequently, DA is also examined by Pay Commissions when formulating their future report. It is the responsibility of the pay commissions to consider all contributing factors when calculating salaries. This also involves the periodic evaluation and update of the factor multiplier used to calculate DA.
Dearness Allowance For Pensioners
In this context, pensioners are retired central government or state government personnel who are eligible for an individual or family pension from the government. Every time the Pay Commission implements a new compensation structure, the pension of retired employees is adjusted accordingly. Similarly, if the Dearness Allowance changes by a certain amount, the pension of retired staff is adjusted proportionally.
Dearness Allowance Hike As Per New Developments Under The Budget
The dearness allowance for central government employees and retirees is 34% as of January 2022. This is a 3% increase from the 31% of 2021 and will benefit more than 50 lakh central government employees and more than 55 lakh retired employees. Since 2006, the DA for federal employees has been steadily increasing. The value is currently 50% of your basic salary, and the DA that exceeds this threshold is typically combined with the basic pay. This is done while retaining all other allowances as components, and as a result, it provides you with a significant income gain.
Dearness Allowance Merger
Since the change of the calculation formula, the DA for employees in the public sector and the national govt has steadily increased. Currently, it stands at fifty per cent of the base income. This is a result of the annual increase in the DA to counteract the negative impacts of inflation. In accordance with the regulations, it is customary to combine the DA with the base income when it exceeds 50%. As all other components of the income are computed based on the basic salary, this would result in a considerable salary increase for the employees. The demand has been presented to the government, and a decision along these lines is expected shortly. If the ruling goes in favour of the employees, their incomes will increase dramatically.
Way to Save Tax Liability
If you receive a dearness allowance as part of your salary, the allowance will be taxed at your income tax slab rate. However, you can reduce your income tax liability in a number of ways. The following are examples of few saving schemes:
Use the deduction permitted by Section 80C
Under Section 80C of the Income Tax Act of 1961, you are eligible for a deduction of up to INR 1.5 lakhs if you invest in qualifying avenues or incur eligible costs. In accordance with Section 80C, the following are tax-deductible investments:
- Life insurance premiums
- A house loan’s principal balance is repaid.
- tuition fees paid for five-year fixed deposits for children
- Sukanya Samridhi Yojana
- Senior Citizen Saving Scheme, etc.
- Investing in NPS: The National Pension System allows you to claim an extra deduction of up to INR 50,000 under Section 80CCD (1b). This deduction is in addition to the deduction provided under Section 80C.
- Invest in health care coverage: Section 80D permits a deduction for premiums paid on health insurance coverage. For older citizens, the deduction ceiling increases to INR 50,000 from INR 25,000. If your parents are elderly citizens and you get health insurance coverage for them, you are eligible for an additional INR 50,000 tax reduction.
- Home loan interest tax benefits: Section 24 allows home loan interest as a tax-exempt expense (b). The exemption amount cap is 2 lakhs INR. Additionally, you can deduct an additional 1.5 lakh rupees from your house loan interest payments under Section 80 EEA if you are a first-time home buyer and meet the eligibility requirements.
Conclusion
If you are an employee of the public sector or the central government (or a retiree of such services), you are eligible for a dearness allowance that constitutes a significant portion of your income. It is simply a cost-of-living adjustment allowance paid to counter inflation. DA is completely taxed, and you must include DA on your ITR in order to be eligible for the applicable benefits.
FAQs
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Who approves of the D.A?
The Ministry of Finance, Central Government, reviews, amends, and awards the dearness allowance.
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Is DA similar to a special allowance?
No, the dearness allowance and the special allowance are not the same things. Among the particular benefits are the leave travel, medical, and transportation allowances. Employees in the public and private sectors are equally eligible for special allowances. The employment contract and any related negotiations between the employer and the employee will determine how much the special allowance will be. On the other hand, the dearness allowance is a payment made by the Central Government to its public sector employees as mandatory compensation for the expense of inflation.
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Is DA applicable for private sector employees and retirees?
No, private sector employees in India are not entitled to D.A as part of their remuneration.
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Are Section 80C deductions applicable on dearness allowance?
Your salary income includes the dearness allowance, which raises your gross income. As a result, you can deduct taxes from your gross pay income using Section 80C deductions rather than separately from your dearness allowance.
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