Dearness Allowance (DA): Types and Calculation Methods

Dearness Allowance or DA is a part of the salary structure in the payroll system of India. It is provided by the Indian government to its pensioners and employees to offset inflation. Effective from January 2024, the DA was raised by 4% to 50% for central government employees. 

Although the government has taken various measures to control inflation, prices may still rise based on market movements. Since the impact of inflation varies by location as well, the DA in income tax is also calculated accordingly. 

Therefore, it differs from one employee to another depending on sectors such as rural, semi-urban, and urban sectors.

Dearness allowance is revised twice a year, once in January and then in July. The formula for DA calculation was revised by the government in 2006. The present formula is as follows:

• For Central Government Employees

DA % = {(Average AICPI (Base Year 2001 = 100) for the last twelve months - 115.76 ) / 115.76} * 100

• For Public Sector Employees

DA % = {(Average AICPI (Base Year 2001 = 100) for the last three months - 126.33 ) / 126.33} * 100

In this case, AICPI stands for the All-India Consumer Price Index

Dearness Allowance is taxable under the Income Tax Act, 1961, and it is entirely taxable for salaried employees. If the employee has an unfurnished and rent-free accommodation, then it becomes a part of salary. It also becomes a part of the retirement benefit of the individual if all the conditions are met. 

The Income Tax Act rules state that the DA component must be separately mentioned in the ITR when filed.

The pay commission evaluates and revises the public sector employees’ salaries based on the several sections within the employee’s pay slips. This includes updating the factor of multiplication and periodic reviewing for the calculation of DA for tax purposes. Hence, DA is considered by the pay commission while making the next report.

Dearness allowance are of two types, these are:

• Variable Dearness Allowance

Employees of the central government receive a variable dearness allowance. It is revised twice a year based on the Consumer Price Index (CPI). The CPI changes each month and it is an important factor in variable DA calculation.

There are three components involved in the calculation of variable dearness allowance. They are:

1. Consumer Price Index (CPI): It is a price index, which measures the average change in prices that consumers pay over a period of time for goods and services

2. Base Index: It refers to the year with which you compare the values from other years during calculations

3. The variable DA amount fixed by the central government 

• Industrial Dearness Allowance

The Industrial Dearness Allowance is applicable to public sector employees. The government revises the dearness allowance rate on a quarterly basis, and it is centred around the Consumer Price Index (CPI).

Dearness allowance DA and House Rent Allowance (HRA) are two distinct portions of a salary slip. Here are some differences between the two outlined below:  

The DA for public sector employees has been growing since 2006 to compensate for the rising inflation. The figure now stands at 50% of the basic salary for public sector as well as central government employees. 

According to the rules, in case DA percentage goes above the 50% mark, it should be combined with the base salary. It helps boost salaries of employees as other components of the salary are calculated by keeping this increased as the base salary.