The dearness allowance (DA) hike for government employees is often seen in the news. But what does it exactly entail? How is DA calculated? How does it affect the salaries and pensions of government employees? Read here to get a better understanding of it.
According to the appropriate pay scale, all employers in the public sector provide their workers with a basic salary.
The take-home pay is then computed by adding several additional components to the base income. The Dearness Allowance, sometimes known as DA, is one such crucial element.
What is Dearness Allowance?
Dearness Allowance (DA) is an amount given to employees in India, typically in the government sector, as well as some private sector companies, to help them cope with the rising cost of living due to inflation.
- DA is intended to offset the impact of inflation on the purchasing power of employees’ salaries and to ensure that their real income remains constant or at least does not decline.
- To assist them deal with the rising costs, government employees’ effective salaries must constantly be increased.
- The government has taken several steps to reduce inflation, but only little effectiveness has been seen because prices still fluctuate based on the market.
- Therefore, protecting government workers from the negative impacts of inflation becomes crucial.
- The dearness allowance is determined by the location of the employee since the impact of inflation differs. As a result, depending on whether a person works in the urban, semi-urban, or rural sector, their DA fluctuates.
The dearness allowance for employees and pensioners is worked out based on the latest Consumer Price Index for Industrial Workers (CPI-IW) brought out by the Labour Bureau every month.
- The government usually revises the DA rates periodically, typically twice a year, based on changes in the CPI and the prevailing economic conditions. The revisions are generally made on January 1 and July 1 each year.
- DA is distinct from the basic pay of an employee and is usually revised separately from salary adjustments.
- DA is primarily applicable to government employees, public sector undertaking (PSU) employees, and employees of some private sector companies where it is part of the employment contract or collective bargaining agreement.
Tax Treatment of Dearness Allowance
- Dearness Allowance is fully taxable under the Income Tax Act in India. It is treated as part of the employee’s salary income and is subject to income tax deductions.
Impact on Pensioners
- DA is also provided to pensioners to compensate for the impact of inflation on their pensions. Pensioners typically receive the same percentage of DA as current employees.
- It is called Dearness Relief (DR) when provided to pensioners.
Calculation of DA
Dearness Allowance is calculated as a percentage of the basic salary of an employee.
The percentage is determined based on the average increase in the Consumer Price Index (CPI) for Industrial Workers over a specific period.
Presently, DA is calculated as per the following formula:
For Central Government Employees
DA% = [(Average of AICPI (Base Year 2001 = 100) for the last 12 months – 115.76)/115.76] x 100
For Public Sector Employees
DA% = [(Average of AICPI (Base Year 2001 = 100) for the last 3 months – 126.33)/126.33] x 100
Here, AICPI means All-India Consumer Price Index.
Role of Pay commission in DA calculation
DA is also considered by the Pay Commissions while preparing the subsequent pay commission report.
- Every element that contributes to the determination of salaries must be taken into consideration by the pay commissions.
- This also covers the routine examination and update of the multiplicand used to calculate DA.
Types of Dearness Allowance
For calculation, DA is majorly divided into two categories: Industrial Dearness Allowance and Variable Dearness Allowance.
Industrial Dearness Allowance (IDA)
- Industrial Dearness Allowance applies to employees working in public sector enterprises and government-owned corporations.
- The IDA for public sector employees undergoes quarterly revision depending on the Consumer Price Index to help offset the impact of rising levels of inflation.
Variable Dearness Allowance (VDA)
- Variable Dearness Allowance applies to employees working in specific industries, particularly those in the labor-intensive sectors of the central government.
- The rates of VDA are revised periodically by the respective wage boards or authorities to account for changes in the cost of living.
- VDA in itself is dependent on three different components-
- 1) Base Index – remains fixed for a particular period.
- 2) Consumer Price Index – impacts VDA as it changes every month.
- 3) Variable DA amount that has been fixed by the Government remains fixed unless the government revises the basic minimum wages.
There few other types:
Central Dearness Allowance (CDA): Central Dearness Allowance applies to employees working in the central government of India. It is revised periodically by the Central Government based on changes in the Consumer Price Index (CPI) for Industrial Workers.
State Dearness Allowance (SDA): State Dearness Allowance applies to employees working in state governments and is revised by the respective state governments based on changes in the CPI or other factors.
Dearness Relief (DR): Dearness Relief is a type of Dearness Allowance provided to pensioners to compensate for the impact of inflation on their pensions. The rates of Dearness Relief are typically linked to the rates of Dearness Allowance for current employees.
Variable Dearness Allowance (for Agricultural Workers): Some states in India provide Variable Dearness Allowance to agricultural workers, which is linked to changes in the cost of living and agricultural produce prices.
City Compensatory Allowance (CCA): City Compensatory Allowance is sometimes considered a type of Dearness Allowance. It is provided to employees working in metropolitan cities or high-cost areas to offset the higher cost of living in those regions.
DA vs HRA
The HRA and the DA are two distinct components with differing tax treatment, thus they should not be confused.
- One notable distinction is that whereas DA is available to all employees, HRA is only available to those working in the public sector.
- In addition, HRA is eligible for several tax deductions that are not accessible to DA recipients.
The calculation and rates of Dearness Allowance can vary depending on the organization’s policies and agreements.
The objective of providing DA is to ensure that employees’ compensation keeps pace with the rising cost of living and helps maintain their purchasing power, especially during periods of inflationary pressures.
-Article by Swathi Satish