7th Pay Commission: Dearness allowance types, calculation

Dearness allowance is paid by the government to its employees as well as pensioners as the cost-of-living allowance to cushion them from rising prices.

The Centre is on Saturday likely to decide on disbursing the pending dearness allowance (DA) to its employees and pensioners under the 7th Pay Commission. Officials of the Union finance ministry, National Council of Joint Consultative Machinery and the department of personnel and training are scheduled to meet and take a final call on pending dearness allowance.

Dearness allowance is calculated twice every year – in January and July. (Representative image)

What is dearness allowance?

Dearness allowance or DA is paid by the government to public sector employees as well as pensioners as the cost-of-living allowance to cushion them from rising prices. DA is calculated according to the employees' basic salary based on the respective pay scale and added along with other components as take-home amount. DA varies from employee to employee based on their presence in the urban, semi-urban or rural sector.

How is dearness allowance calculated?

Dearness allowance is calculated twice every year – in January and July. The formula to calculate the dearness allowance was changed in 2006 by the government. According to Clear Tax, dearness allowance is calculated as per the following formula: For the central government employees of % of DA = {(Average of the All-India Consumer Price Index (Base year -2001 =100) for the last 12 months -115.76)/115.76} x 100For Central Public Sector Employees % of DA = {(Average of the All-India Consumer Price Index (Base year -2001 =100) for the last 3 months -126.33)/126.33} x 100.

Have there been revisions in dearness allowance?

Currently, the central government pays its employees a dearness allowance of 17 per cent, which has been effective from July 2019. The dearness allowance of the central government employees was raised by 4 per cent in January 2020, by 3 per cent in June 2020 and by 4 per cent in January this year. The revisions in dearness allowance, however, were kept on hold due to the coronavirus pandemic. The Centre has said the stalled dearness allowance and dearness relief (DR) will be resumed from July 1, 2021. If restored from July 2021, the decision would benefit about 5 million central government employees and more than 6.5 million pensioners.

However, any hike in DA from July 1 will only be effective from that day and employees would not get any arrears on non-revision of DA for the previous period. The dearness allowance, currently paid at the rate of 17 per cent, is likely to be raised by 11 per cent, taking the total percentage hike to 28 per cent, according to reports.

Is dearness allowance taxable?

Under the income tax rules in India, the dearness allowance component has to be mentioned separately in the income tax returns or ITRs. DA is fully taxable for salaried employees.

What are the types of dearness allowance?

Dearness allowance is divided into two separate categories: industrial dearness allowance and variable dearness allowance.

Industrial dearness allowance applies to the public sector employees of the central government. The industrial dearness allowance is revised quarterly and depends upon the Consumer Price Index (CPI) to help offset the impact of rising inflation.

Variable dearness allowance (VDA) applies to the employees of the central government. It is revised every six months according to CPI.