- Date : 30/01/2023
- Read: 4 mins
Do you know about the treatment of Dearness Allowance for income tax purposes? Read this article to know more.
The Government and Public Sector provide employees and pensioners with a Dearness Allowance (DA) to help adjust to the rising cost of living. This allowance is intended to help employees cope with inflation and the rising cost of living. In this article, we throw light on the following aspects of DA:
- What is DA
- Calculation of DA
- Tax treatment of DA
- Different types of DA
- Role of Pay Commissions in calculating DA
- Merger of DA
What is Dearness Allowance?
The government provides DA to its employees and pensioners to counteract the effects of inflation on their salaries. Despite efforts to control inflation, prices continue to rise, making it necessary for the government to protect its employees. Dearness Allowance is calculated based on the location of the employee, resulting in different amounts for those in urban, semi-urban, or rural areas.
How to calculate Dearness Allowance? Calculation of DA
To counteract the effects of inflation on employee salaries, Dearness Allowance is calculated twice annually in January and July. The method for calculating Dearness Allowance was altered by the government in 2006. The following formulas are used to calculate DA:
- Percentage of DA for Central Government employees = {(Average of the All-India CPI (Base year -2001 =100) for the last 12 months -115.76)/115.76} x 100
- Percentage of DA for Public Sector employees = {(Average of the All-India CPI(Base year -2001 =100) for the last 3 months -126.33)/126.33} x 100
Note CPI = Consumer Price Index
DA Tax treatment
According to the Income Tax Act 1961, salaried employees are fully subject to taxation. If a salaried employee receives rent-free accommodation from their employer and all the necessary conditions are met, the dearness allowance becomes a part of the salary and is considered a retirement benefit salary component.
Different types of Dearness Allowance
There are two types of DA. These are explained below:
Industrial Dearness Allowance: This is given to Public sector employees. It is adjusted quarterly based on the CPI to counter the effects of inflation.
Variable Dearness Allowance: This is given to Central Government employees. Every six months, it is adjusted according to the CPI to counteract the effects of inflation. The Variable Dearness Allowance (VDA) is determined by three different components which include Base Index, CPI and VDA amount fixed by the Government.
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Calculation of Dearness Allowance (Role of Pay Commissions)
The Pay Commission is responsible for evaluating and adjusting the salaries of public sector employees, taking into account all the elements that make up an employee's final salary. As a result, Dearness Allowance is also taken into account by the Pay Commission when preparing its report.
The Pay Commissions have the duty to consider all elements that contribute to salary calculation, which also encompasses regularly reviewing and updating the multiplication factor for DA calculation. For the latest information on DA, visit "https://doe.gov.in/Dearnes-Allowance".
Dearness Allowance for Pensioners
Pensioners refer to retired employees of the central government who are entitled to receive individual or family pensions from the government. Whenever a new salary structure is released by the Pay Commission, the pension of the retired employee also reflects the changes. Similarly, if the Dearness Allowance is modified by a certain percentage, the pension of the retired personnel is also adjusted accordingly.
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Merger of Dearness Allowance
The DA for public sector employees has been steadily increasing and currently stands at 50% of the basic salary. This increase has been implemented to hedge against rising inflation. It is common practice to combine the DA with the basic salary when the percentage exceeds 50%. The Union Cabinet is expected to make a decision on merging DA with the basic salary in the near future. Dearness Allowance is a cost-of-living adjustment allowance given to employees to offset the impact of inflation on their purchasing power.
Conclusion:
DA is a cost-of-living adjustment allowance given to employees and pensioners of the Government (including Public Sector Units). It is calculated twice (January and July) annually and is based on the location of the employee, resulting in different amounts for those in urban, semi-urban, or rural areas. There are two types of DA: Industrial Dearness Allowance, and Variable Dearness Allowance. The merger of DA with the basic salary is a common practice when the percentage exceeds 50%.
