Dearness Allowance (DA) in Salary: Meaning, Calculation and Types

In terms of employment, people in India work in both the public and private sectors. Recent estimates indicate that 6.8 million people receive government pensions, including family pensions, and that out of India’s 40 million salaried workers, nearly 5 million work for the government. Dearness Allowance (DA) is one of the components that make up salary packages. Employers in the public and private sectors are given this allowance specifically to help with the rising cost of inflation. In this article, we will dig deeper into understanding Dearness Allowance (DA) in salary.

What is Dearness Allowance?

DA full form in salary is Dearness Allowance which is an integral part of the salary structure in the payroll system of India. It serves as a cost of living adjustment that the government provides to public sector employees and pensioners. The allowance is calculated as a percentage of the regular salary to mitigate the impact of inflation. When filing an Income Tax Return (ITR), it is mandatory to declare the tax liability associated with DA. This salary component is applicable to employees in both India and Bangladesh.

Current Dearness Allowance Rate

Since DA is based on the cost of living, it is not a fixed component. It varies among public sector employees based on their respective locations. Therefore, the DA allowance differs for employees in rural, urban, and semi-urban sectors.

DA rates undergo revision twice a year. The government increases this allowance every six months. Typically, changes are implemented on January 1st for the period between January and June, and on July 1st for the period from July to December.

How to Calculate DA in Salary

Dearness Allowance is added to your salary along with basic salary and other components of the salary.

For Central Government employees

Dearness Allowance % = ((Average of AICPI (Base Year – 2016=100) for the past 12 months -115.76)/115.76) *100

“The Labour Bureau has changed the base year of the Consumer Price Index for Industrial Workers from 2001 to 2016. The link factor for the new series (2016=100) to the old series (2001=100) is 2.88.” – Source

For Central Public Sector Company employees

Dearness Allowance % = ((Average of AICPI (Base Year – 2016=100) for the past 3 months -126.33)/126.33) *100

Check out more data about Consumer Price Index here.

For Private sector employees

The specific formula for calculating DA in the private sector may not be publicly available or standardized across all private companies. Employees in the private sector are advised to refer to their company’s HR policies or consult with their HR department for detailed information on the calculation of Dearness Allowance specific to their organization.

Types of Dearness Allowance

There are two types of Dearness Allowance (DA): Industrial Dearness Allowance (IDA) and Variable Dearness Allowance (VDA).

Industrial Dearness Allowance (IDA) is specifically for public sector employees of the Central Government. It is revised every quarter in response to changes in the Consumer Price Index, which helps counteract the effects of rising inflation levels. On the other hand, Variable Dearness Allowance (VDA) is applicable to Central Government employees. This allowance is revised every six months, also in accordance with the Consumer Price Index, to address the impact of inflation. This ensures that necessary adjustments are made to mitigate the effects of inflationary pressures. The VDA itself depends on three components, which are:

1. Base Index: Remains fixed for a specific period.
2. Consumer Price Index: Influences VDA as it fluctuates monthly.
3. Variable DA Amount: Determined by the government, remains fixed unless the basic minimum wages are revised.

Is DA Exempted From Income Tax?

The entire amount is subject to taxation for the employees. It is included in their salary under section 17(1) of the Income Tax Act. If an individual’s income consists solely of a salary and does not exceed INR 50,00,000, they can file ITR 1 for tax purposes.

What Is the Difference Between DA and HRA?

DA in salary is calculated as a percentage of the basic salary of a public sector employee. HRA is not calculated as a percentage of the basic salary. Let’s learn through table:

Final Thoughts

DA or dearness allowance is a component of an employee’s salary that helps them cope with the rising cost of living. This allowance is adjusted periodically based on inflation rates and is applicable to both public and private sector employees in India. While it may seem like a small percentage of the overall salary, it can have a significant impact on an employee’s financial stability. Therefore, it’s important for employees to understand how DA works and how it affects their compensation package. By being aware of these details, they can negotiate better salaries and plan their finances more effectively. So don’t overlook the importance of DA in salary – it could be the key to achieving financial security!

FAQs:

1. What Is Dearness Allowance for Pensioners?

   Whenever there is a revision in the salary of public sector employees, a corresponding adjustment is made to the pension received by retired employees. As a result, the dearness allowance provided to retired employees is directly influenced by this revision.

2. What Is the Change in Dearness Allowance?

   The Indian government made the notable choice to raise the Dearness Allowance for all Central Government employees and pensioners by 3% in the fiscal year 2021. As a result, the current Dearness Allowance percentage is an astounding 31%. The beneficiaries of this hike experience significant relief and increased financial security.

3. Are Foreign Pensioners Eligible for Dearness Allowance?

   The Indian Government will not pay a pensioner Dearness Allowance (DA) if they decide to live and work abroad. The Indian Government does, however, provide a DA to pensioners who do not work abroad.

4. Does an Employee Need to Pay Tax for Dearness Allowance?

   When DA exceeds the 50% cap, it is combined with the employee’s base pay. The employees’ salaries increase significantly as a result of this merger. DA is currently set at 50% of an employee’s basic pay.

5. When is DA Merged With the Basic Salary of an Employee?

   DA in Salary is merged with the basic salary of an employee when it exceeds the limit of 50%. This results in a salary hike for the employees.