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    Dearness Allowance: Calculation, Types, Taxability & Role of Pay Commissions

    dearness allowance
    (Source: etb2bimg)

    Dearness Allowance is paid to employees and pensioners of the Central Government. This article will discuss everything about the meaning of dearness allowance, how to calculate dearness allowance, and how it differs from HRA.

    Let’s delve in!

    What Is Dearness Allowance?

    allowance dearness
    (source: kalingatv)

    Dearness Allowance is a component of a salary structure in an Indian payroll system.

    All public sector employers pay their employees a Dearness Allowance to offset the effect of inflation.

    We base the calculation of dearness allowance on the location of a person’s job. Moreover, DA is different for different sectors, such as urban, rural and semi-rural sectors.

    To shield its employees from inflation, companies and the Indian Government opt for DA or Dearness Allowance.

    How to Calculate Dearness Allowance?

    allowance dearness
    (source: kalingatv)

    Presently Dearness Allowance is calculated as follows -

    • We calculate DA on the basic salary of an employee. 
    • We calculate Dearness Allowance twice a year in January and July. 
    • In 2006, the Indian Government changed the formula for calculating Dearness Allowance. 

    There are two ways in which we figure Dearness Allowance. We have shown both methods below:

    Type of Employment

    Formula to Calculate % of DA

    Central Government Employees

    ((Average of All India Consumer Price Index (Base Year 2001 = 100) for past 12 months – 115.76)/115.76) *100

    Employees of Central Public Sector Companies

    ((Average of All India Consumer Price Index (Base Year 2001=100) for past 3 months -126.33)/126.33)*100

    What Are the Types of Dearness Allowance?

    There are two types of Dearness Allowance. They are -

    1. Industrial Dearness Allowance

    The Indian Government pays this allowance to the employees of public sector companies. Moreover, the Indian Government revises the rate of DA every quarter and bases it on the consumer price index.

    2. Variable Dearness Allowance

    The Central Government offers this dearness allowance to those employees employed under it. Moreover, it revises it on a half-yearly basis and bases it on the consumer price index.

    There are 3 elements in calculating a variable dearness allowance. They include:

    3. Consumer Price Index

    This index changes every month and is a significant factor in the calculation of the variable dearness allowance.

    • DA Amount Set by the Government
    • It remains fixed until the Government increases or decreases the basic minimum wage. 
    • Base Index

    This index also remains fixed for a particular period.

    How Is Dearness Allowance Treated Under Income Tax?

    Under the Income Tax Act, Dearness Allowance is entirely taxable. It is especially the case for those who are salaried employees as per Income Tax Act 1961.

    However, suppose an employee is residing in a rent-free, unfurnished accommodation that the employer has provided. In that case, the part of the Dearness Allowance will equal the retirement benefit that the employee receives.

    What Is the Role of Pay Commissions in Calculating Dearness Allowance?

    Every pay commission takes into account these components of salary before re-evaluating it. Reviewing the wages of public sector employees falls under the purview of this Pay Commission. Hence dearness allowance, too, falls under it.

    What Is Dearness Allowance for Pensioners?

    Every time the salary of public sector employees is revised, pension for retired employees is also modified. Hence, the dearness allowance that retired employees are paid depends on this revision.

    What Is the Change in Dearness Allowance?

    As of FY 2021, the Indian Government hiked Dearness Allowance by 3% for all the Central Government employees and pensioners. This hike has put the percentage of Dearness allowance presently at 31%.

    What Is the Difference Between DA and HRA?

    Dearness Allowance

    HRA

    Dearness allowance is paid to only the employees of Central Government and public sector employees.

    HRA is available for both public and private sector employees.

    Dearness allowance is a fixed percentage of basic salary.

    HRA is not calculated on the basis of basic salary.

    DA is fully taxable with no exemptions.

    HRA is partially taxable, and any employee can claim certain exemptions under the Income Tax Act.

    The rate of DA is periodically revised.

    HRA does not change unless the salary structure changes.

    This article explained the meaning of dearness allowance and the method of calculating the same. Dearness allowance is an essential part of the salary structure and is required by employees to combat the effects of inflation. Hence, employees are keen to know some details regarding it.

    Frequently Asked Questions

    Are foreign pensioners eligible for dearness allowance?

    If a pensioner resides in a foreign country and works there, the Indian Government pays no DA to that person. However, if any pensioner does not work in a foreign country, then the Indian Government pays a DA.

    If a pensioner resides in a foreign country and works there, the Indian Government pays no DA to that person. However, if any pensioner does not work in a foreign country, then the Indian Government pays a DA.

    Do private-sector employees receive Dearness Allowance?

    No, private sector employees do not receive DA. Moreover, they do not have an entitlement to DA.

    No, private sector employees do not receive DA. Moreover, they do not have an entitlement to DA.

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    Disclaimer: This information is added only for informative purposes and collected from different sources across the Internet. Digit Insurance is not promoting or recommending anything here. Please verify the information before making any decisions.

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    Last updated: 2023-03-23

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