Last Updated on May 24, 2022 by

Whether you are a private sector employee or a public sector employee in India, benefits and allowances make up a considerable part of the take-home salaries. The primary goal behind this is to reduce the taxability of income. Your basic pay is decided as per the respective pay scale, and then, several components such as allowances are added to the basic pay to comprise the total salary. For public sector employees, one such allowance is the Dearness Allowance or DA. 

If you are a new public sector employee or just someone looking for information on the dearness allowance, then you have reached the right place. Here is a quick guide covering everything from what is dearness allowance to the percentage of DA for central government employees in India.

What is a dearness allowance?

A DA is a fixed percentage of your basic pay that is added as a component in your take-home salary. The DA is aimed at balancing inflation in the cost of living and varies from employee to employee based on where you are located. If you are in a Tier I city in India, your dearness allowance would be much higher as compared to if you are in a Tier II city. In other words, it is an adjustment to your cost of living that is paid to both current and retired public sector and central government employees in India.


While the DA accounts for the cost of living, it is different from a house rent allowance (HRA). The two are separate components of your salary and thus come with different income tax implications and exemptions. Moreover, both private and public sector employees get an HRA, whereas DA only applies to public sector employees

Different types of dearness allowance

Dearness allowance is classified into 2 categories for the sake of easy calculation – industrial DA and variable DA. 

Industrial DA, or IDA, is applicable if you are a public sector employee. The IDA undergoes revisions every quarter of the financial year to absorb hikes in the cost of living. 

Variable DA, or VDA, is applicable if you are a direct employee of the central government. The VDA undergoes revisions every 6 months and is further dependent on 3 components:

  • The base index which is fixed over a longer duration.
  • Consumer price index, which changes every month.
  • VDA amount fixed by the Government which remains the same until the government revises the minimum wages.

How is dearness allowance calculated?

Your dearness allowance is calculated twice a year to account for price rise during a financial year – January and July.

DA for central government employees is calculated by the formula:

% of DA = {(Average of AICPI (base year – 2001 = 100) for the last 12 months – 115.76) / 115.76} x 100

DA for central public sector employees is calculated by the formula:

% of DA = {(Average of AICPI (base year – 2001 = 100) for the last 3 months – 126.33) / 126.33} x 100

Here, AICPI stands for All-India Consumer Price Index.

In 2020, in an attempt to broaden the range of DA, the Ministry of Labour and Employment modified the formulae to incorporate the new Wage Rate Index series with the new base year as 2016 = 100. This was done on the recommendation of the International Labour Organisation.

The pay commission plays a significant role in the calculation of dearness allowance in that they have the responsibility of revising your total salary basis the changes in its components. 

They consider the DA when preparing the pay commission report. Thus, they are responsible for periodically updating the multiplication formula for the calculation of the DA.

Taxation on dearness allowance

DA in India is taxable if you are a salaried Government or public sector employee. However, if you are provided with an unfurnished no-rent accommodation, your DA will become a part of your salary up to the extent that it forms your retirement benefit salary. When filing your income tax returns, make sure to mention your DA component separately.


Dearness allowance for retired employees

Retired employees of the central government who are eligible for a pension, either individual or family pension from the government, are also eligible for a dearness allowance as part of their retirement benefit salary. The DA of a retired employee changes every time the pay commission rolls out a new pension structure. 

Central government employees DA hike

As of January 2022, the dearness allowance for central government employees and retired employees is 34%. This is a 3% hike from the 31% of 2021 and benefits over 50 lakh central government employees and over 55 lakh retired employees.

Since 2006, the DA for central government employees has been growing continuously. The figure is now at 50% of your basic pay, and as a rule, DA exceeding the 50% mark is merged with the basic pay. This is done keeping all other allowances as components and thus acts as a great salary booster for you. 

Conclusion

If you are a public sector or central government employee (or a retiree of such services), then you are eligible for a dearness allowance which is a major part of your salary. It is essentially an allowance paid as a cost of living adjustment to combat inflation. DA is fully taxable, and it is important for you to make sure to file the DA as part of your ITR to be eligible for appropriate benefits. 

Ayushi Mishra
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