Being a salaried employee you must have heard about dearness allowance as part of your salary. Your salary comprises a basic fixed salary and a few allowances. The total of basic pay and allowances make up your take-home salary. It is an incentive given as an adjustment for the cost of rising inflation.
What is Dearness Allowance?
Dearness allowance is a cost-of-living adjustment paid by the government to government employees and pensioners. 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. As a result, DA differs depending on whether a person works in an urban, semi urban, or rural area.
What are the Types of Dearness Allowance?
Industrial Dearness Allowance (IDA)
IDA is applicable to public sector employees of the Central Government. To
compensate for the rising cost of inflation, IDA is revised quarterly by the
Central Government. The quarterly revision is based on the consumer price
index. The Central Government has increased the IDA by 5% for the public
sector.
Variable Dearness Allowance
Variable Dearness Allowance (VDA) applies to the employees of the Central Government. It is revised every six months according to the Consumer Price Index to help offset the impact of rising levels of inflation. VDA in itself is dependent on three different components as given below.
- Base Index – remains fixed for a particular period.
- Consumer Price Index – impacts VDA as it changes every month.
- Variable DA amount that has been fixed by the Government remains fixed unless the government revises the basic minimum wages.
How to Calculate Dearness Allowance?
After 2006, the Central Government changed the formula for the calculation of dearness allowance. The following is the calculation for central government employees, public sector employees, and pensioners.
Central Government Employees
Dearness Allowance % = ((Average of AICPI (Base Year 2001=100) for the past 12 months -115.76)/115.76) *100
Public Sector Employees
Dearness Allowance % = ((Average of AICPI (Base Year 2001=100) for the past 3 months -126.33)/126.33) *100
Pensioners
With every rollout of a new salary structure by the pay commission, the pension amount for retired public-sector employees is revised as well. Similarly, every time the dearness allowance is increased, such a change is reflected in the pension amount of pensioners. This change is applicable to a regular pension as well as a family pension.
Treatment of Dearness Allowance under Income Tax
As per the latest updates, DA is fully taxable for salaried employees. If the employee has been provided with an unfurnished rent-free accommodation, it becomes that part of the salary up to which it forms the retirement benefit salary of the employee, provided that all other pre-conditions are met. The Income Tax rules in India require the dearness allowance component to be mentioned separately in the returns that have been filed.
Changes in Dearness Allowance as per the Budget 2018
As per an estimate, there are more than 50-lakh central government employees who receive the salary from the government. Then there are another 55-lakh retired central government employees who are eligible for a pension. As per the recent announcement by the central Government in Budget 2018, the Dearness Allowance was hiked by 2%.This came as a significant relief for all these beneficiaries as their Dearness Allowance was enhanced from 5% to 7%. These changes are going to significantly benefit all the employees and pensioners of the Central Government.
Role of Pay Commission
Based on the numerous components that make up an employee’s final wage, the pay commission must examine and alter the salaries of public sector employees. As a result, DA is taken into account by Pay Commissions when compiling subsequent pay commission reports. They are responsible for taking into account all factors that contribute to the determination of salaries. This also requires examining and revising the multiplication factor used to calculate DA on a regular basis.
