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Dearness Allowance (DA): Rules, Exemptions, and Calculations

by | May 5, 2024 | Income Tax | 0 comments

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Important Keyword: Dearness Allowance, Salary Components, Salary Income.

Dearness Allowance (DA): Rules, Exemptions, and Calculations

In India, the employment landscape encompasses both the private and public sectors. Recent estimates suggest that out of the 4 crore salaried employees in the country, approximately 50 lakh are government employees, with an additional 68 lakh comprising government pensioners, including family pensioners. Among the various components of salary, Dearness Allowance (DA) holds significance. It is exclusively provided to government and private sector employees to offset the impact of inflation on their living expenses.

What is Dearness Allowance?

DA is an integral part of the salary structure designed to mitigate the effects of inflation. It is disbursed to government employees to counteract the rising cost of living. The allowance is tailored to suit the location of the employee, whether in urban, semi-urban, or rural areas. DA is exclusively provided to:

  1. Central Government Employees,
  2. Public Sector Employees, and
  3. Pensioners of the Central Government.

In India, the rate of DA is determined by the Pay Commission. This commission is responsible for assessing and adjusting the salaries of central and public sector employees, taking into account various components that constitute their overall remuneration package.

Types of DA

DA is categorized into two main types:

  1. Industrial Dearness Allowance (IDA): IDA is relevant for Public Sector employees. It undergoes quarterly revisions, which are contingent upon the prevailing inflation rates.
  2. Variable Dearness Allowance (VDA): VDA is applicable to Central Government employees. It sees updates every six months, aligning with the fluctuations in inflation.

The government sets the VDA, maintaining its consistency until adjustments are made to the basic minimum wages.

How to Calculate DA?

DA is a crucial component of the employee’s salary structure, calculated as a fixed percentage of the Basic Salary. Its calculation is closely linked to the employee’s geographical location, with separate indices for urban, semi-urban, and rural sectors in India. Consequently, DA rates vary for employees in each sector. The calculation formula differs for Central Government and Public Sector employees:

For Central Government Employees:

DA %=[(Average of AICPI(Base year 2001=100) for the past 12 months−115.76115.76)]×100DA %=[(115.76Average of AICPI(Base year 2001=100) for the past 12 months−115.76​)]×100

Here, AICPI refers to the All India Consumer Price Index.

For Public Sector Employees:

DA %=[(Average of AICPI(Base year 2001=100) for the past 12 months−126.33126.33)]×100DA % =[(126.33Average of AICPI(Base year 2001=100) for the past 12 months−126.33​)]×100

The Pay Commissions play a crucial role in determining DA. They assess and adjust the salaries of public sector employees based on various salary components, including DA. This consideration is evident in subsequent pay commission reports, where every factor influencing salary computation, including the periodic review and adjustment of the multiplication factor for DA calculation, is thoroughly examined.

Taxability of DA

DA is fully taxable for employees and is considered part of their salary income under Section 17(1) of the Income Tax Act. When filing income tax returns (ITR), taxpayers with salary income up to INR 50,00,000 can utilize ITR 1.

Dearness Allowance for Pensioners

Pensioners, retired employees of the central government, receive individual or family pensions. Like active employees, pensioners’ DA is calculated as a percentage of their Basic Pension. Whenever the Pay Commission introduces a new salary structure, pensions are also revised accordingly.

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Official Income Tax Return filing website: https://incometaxindia.gov.in/

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