Important Things You Must Know About Dearness Allowance

Dearness Allowance

Dearness Allowance is an integral part of the salary stack extended by the Central Government to its employees. It is a fully taxable component, the tax liability is in the hands of the salaried employee. Typically, DA is a percentage of the basic pay of the employee, it is also paid to retired employees as part of their pension. Here are some important aspects that you should be aware of concerning your DA.

Dearness allowance meaning:

As the dearness allowance meaning suggests, Dearness allowance means a certain % of basic salary extended by your employer (Government) to help you cope with the increasing prices, which is an aftermath of inflationary trends in the macro-environment. Although the Government, on the one hand, tries to control the inflation rate it has not been successful in keeping the inflation range-bound, which has resulted in a substantial increase in the prices of commodities, which in turn affect the cost of living. DA differs from one location to another, typically a greater percentage of DA is extended to employees working in Urban cities as compared to those working in rural and semi-rural areas.

Inflation is measured periodically, every month, which essentially means that there could be an increase or marginal decrease (very rarely) in consumer products. To keep up with the changing trends of the inflation rate, the % of DA is revised 2 ti in a year. There are different types of DA extended to different segments of employees associated with the Central Government. This sums up the dearness allowance meaning.

Types of Dearness Allowance:

After learning about dearness allowance meaning, there are 2 types of DA that are extended to different categories of Central Government employees. The calculation and revision norms of both these categories are different as indicated below:

Point of differenceIndustrial Dearness Allowance (IDA)Variable Dearness Allowance (VDA)
Type of employeePublic sector employees of the Central GovernmentOther employees of the Central Government
Revisionquarterly revision depending on the Consumer Price Indexevery six months according to the Consumer Price Index

The calculation of DA for both these segments of employees is different and accordingly the components which come into play whilst calculating DA for these categories vary. 

Calculation of Dearness Allowance:

The formula for calculation of DA was revised by the Government in the year 2006, the current formula which is used to calculate the DA is as mentioned below:

Employees of Central Government 

DA % = {(Average of the All-India Consumer Price Index (Base year -2001 =100) for the last 12 months -115.76)/115.76} x 100

Central Government Employees of the Public Sector 

DA % = {(Average of the All-India Consumer Price Index (Base year -2001 =100) for the last 3 months -126.33)/126.33} x 100

The variable DA is dependent on 3 components:

  • Base Index  which remains fixed unless otherwise revised by the Government occasionally based on a recommendation from an appointed committee of experts
  • CPI which is computed every month and varies based on other macro factors
  • Variable DA which remains fixed unless the Government revises the basic minimum wages

Pay commission and its importance in determining Dearness Allowance:

As its clear from dearness allowance meaning, basis the components of the salary stack of the public sector employee, the pay commission determines the DA component. The DA component is also considered by the Pay commission to prepare the subsequent report. Every single component of the salary stack is considered and studied in great detail. It periodically reviews and updates the multiplication factor which is used in the calculation of DA. The role of the pay commission is integral in the determination of DA, the revisions that are effected are based on a recommendation from the pay commission to the Central Government. 

Changes effected in Dearness Allowance for Central Government employees:

The DA underwent drastic changes citing the tough macro environment amidst the pandemic. The rate of dearness allowance was increased to 164% of basic pay for Central Government employees and employees of autonomous central bodies, this was effected in January 2020, just during the onset of the pandemic. It was revised further in July 2021, when the DA rate was revised to 189% of basic pay. The changes effected in July stay valid till the end of December of the same year and it undergoes revision in January which stays valid till the end of June. This way the half-yearly revision is maintained by the Central Government. 

The merger of Dearness Allowance:

DA is merged with the basic pay of the employee if the DA exceeds 50% of the basic salary. The revised calculation mechanism introduced for DA has enabled the DA to increase consistently. DA merger has, in turn, led to a spike in the salary of the employees. The merging of DA works well for the employee as most other components in the salary are calculated as a percentage of the basic salary. 

This is one of the many benefits of being a Central Government employee. Having a good understanding and learning the dearness allowance meaning in your salary stack will help in making informed decisions concerning your job. 

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