Dearness Allowance is a component of salary that is a defined percentage of the basic wage and is used to offset the impact of inflation. Because DA is closely tied to the cost of living, the DA component varies by location for various employees. This means that DA differs depending on whether you work in the city, the semi-urban, or the rural area.
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What is Dearness Allowance, and How Does it Work?
The government pays Dearness Allowance to its employees and retirees to offset the impact of inflation. To keep up with rising prices, government employees’ effective salaries must be improved on a regular basis. Despite the government’s efforts to limit inflation, only partial success has been achieved because prices fluctuate according to market conditions. As a result, it is critical for the government to protect its employees against the negative impacts of inflation. The effect of inflation varies according to the employee’s location, thus the DA is computed accordingly. As a result, DA differs depending on whether a person works in an urban, semi-urban, or rural location.
Dearness Allowance Calculation
The DA component was added by the government after World War II. The formula for determining Dearness Allowance changed after 2006, and it is now computed as follows:
In Case of Central Government Employees:
((Average of AICPI (Base Year 2001=100) for the last 12 months -115.76)/115.76) *100 = Dearness Allowance %
In Case of Central Public Sector Employees:
((Average of AICPI (Base Year 2001=100) for the preceding three months -126.33)/126.33) *100 = DA %
Here, AICPI = All-India Consumer Price Index.
Since 1996, DA has been incorporated to compensate for price increases or inflation during a given fiscal year, and it is therefore amended twice a year, first in January and again in July.
The Ministry of Labor and Employment of the Central Government recently changed the formula for calculating DA. The present base year of 1963-65 will be replaced by a new Wage Rate Index (WRI) series with a base year of 2016=100, according to the new update.
This update was made to improve the index’s performance as well as widen its range. The decision to change the base year was based on a suggestion from the International Labor Organization (ILO).
From September 2020 to June 2021, CPI (IW) with Base 2016=100 was calculated from CPI (IW) with Base 2016=100.
Table of the Consumer Price Index with the Base Year 2001=100 Calc
|CPI (IW) 2001=100
|CPI (IW) 2016=100
Income Tax Treatment of the Dearness Allowance
According to the most recent information, DA is entirely taxed for salaried personnel. If the employee is given unfurnished rent-free housing, it becomes part of the wage up to the point where it becomes the employee’s retirement benefit salary, assuming all other conditions are followed. The DA component must be reported separately in the forms submitted in India, according to the Income Tax laws.
Types of Dearness Allowance
There are various types of Dearness Allowance. Industrial and Variable Dearness Allowance are the two categories used to determine DA.
Industrial Dearness Allowance
The industrial dearness allowance, or IDA, is a stipend paid to employees of public-sector companies. The Indian government has enhanced the IDA for this sector by 5%. This decision will benefit all central PSU board-level leaders, officers, and workers.
To compensate for rising inflation in the economy, IDA for government sector firms is changed quarterly based on the movement of the Consumer Price Index (CPI).
Variable Dearness Allowance
VAD, or Variable Dearness Allowance, is the allowance that central government employees get as an outcome of a six-monthly review. Variable DA is the altered new amount that is received as a result of taking into account the growth or reduction in the Consumer Price Index, CPI. The DA of employees is amended and implemented based on this figure.
VAD is made up of three parts. The consumer price index comes first, followed by the base index, and finally, the government of India’s variable DA amount. Until the government revises the minimum wage, the third component remains unchanged. In the same way, the base index is fixed for a specific time period. Only the CPI (Consumer Price Index) influences the overall value of the variable dearness allowance because it fluctuates every month.
How is DA Treated Under Income Tax?
Dearness Allowance is totally taxable for those who are salaried employees as of Assessment Year 2017-18. Dearness allowance is a portion of the income to the extent that it comprises a part of the retirement benefit salary if employees are supplied with rent-free, unfurnished housing and all other requirements are met.
According to the Income Tax Act, the tax liability for Dearness Allowance must be mentioned in the filed forms.
Pay Commissions’ Role in DA Calculation
Every following pay commission in India is intended to reevaluate the salaries of public sector employees in India, taking into account all of the salary components. The Dearness Allowance is also taken into consideration while preparing the next pay commission report. Pay commissions to take into account all of the criteria that go into calculating the compensation of public sector employees. The pay commissions are also responsible for reviewing and adjusting the multiplication factor.
Dearness Allowance for Pensioners
When a pay commission introduces a new salary structure, the pension for retired public-sector personnel is also updated. The same is true for Dearness Allowance: whenever DA is increased by a certain percentage, it is reflected in the pensions of retired public sector personnel. This is true for both ordinary pensions and family pensions.
Hike in Dearness Allowance in Accordance with the Budget’s New Developments
The increase in Dearness Allowance came as a big comfort to most central government employees. The Union Cabinet recently announced a 2% increase in the DA of government employees.This initiative, spearheaded by Indian Prime Minister Narendra Modi, will benefit over 50 lakh Central Government employees and about 55 lakh retirees. The dearness allowance boost is frequently granted to retirees and staffers to offset the effects of inflation on their salary.
In the field of taxation, 2018 saw a lot of changes. A number of new breakthroughs and developments occurred with the new budget. The Dearness Allowance was increased to 7% for almost 11 million employees, up from 5% previously.
According to the proposed revisions, more than 48.41 lakh central employees and 61.17 lakh pensioners and staffers will benefit from the increase.
What is the Difference Between DA and HRA?
The dearness allowance, also known as DA, is computed as a percentage of the basic income, which is then added to the basic salary, together with other components such as HRA (House Rent Allowance), to make up the total salary of a government employee.
HRA, or House Rent Allowance, is a pay component provided by an employer to an employee to cover expenses associated to the renting of housing for residential purposes. HRA is applicable to employees in both the private and public sectors, whereas DA is primarily applied to employees in the public sector.
The central government intends to increase the HRA after receiving thousands of requests.
Dearness Allowance Merger
The dearness allowance for employees in the public sector has been steadily increasing since 2006. The amount is currently set at 50% of the basic pay. This occurred over a period of several years, during which the DA percentage slowly increased to offset rising inflation.
Once the DA percentage exceeds 50%, it is common practise to integrate the DA with the base salary. Because all other components of the income are computed as a percentage of the basic salary, this is intended to be a huge salary boost for employees. For a long time, the government has been asked to merge the DA with the basic salary.On this issue, the union cabinet is likely to make a decision soon. Employees in the public sector, meanwhile, are overjoyed at the prospect of a merged DA, which would result in a significant pay raise.
No, employees in the private sector in India are not entitled to Dearness Allowance as part of their remuneration.
Yes, DA varies depending on the employee’s job location. Because DA is linked to the cost of living, it is not the same for all employees and differs depending on whether they work in rural, urban, or semi-urban settings.
In order to adjust for inflation or price increases, the Pension Rule 50A provides DA to public sector and family pensioners.
On the basis of the cost-of-living index, DA is assessed biannually, once every six months.
When an employee’s DA surpasses 50%, it is combined with his or her base salary. Employees’ salaries have increased significantly as a result of the merger. DA is now set at 50 percent of an employee’s basic salary.