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

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!

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.

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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:

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:

• 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.

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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.

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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.

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.

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%.