Dearness Allowance

What is Dearness Allowance?

Dearness Allowance (DA) is a provision by the government to its employees for leveling the price level increase of basic life commodities. This is calculated twice a year that is in January and July and then is included in the pay and allowances as per the pay slab of the government servant.

Dearness Allowance (DA) was introduced following the dear food allowance after the Second World War. DA is part of the basic salary of government employees, pensioners including public sector units’ employee(s), to deal with the inflation in the country. This is a shed over by the government to its employees, being the employer.

The DA is evaluated as per the consumer price index because the prices of the commodities are raised as per the markets’ ever-changing turbulent trends. The living area is also taken into consideration for the analysis of such an allowance, differing from case to case as the employees do serve and therefore live at different destinations of the country – some abode their postings in urban areas, others in semi-urban societies; and a few at countryside what we call a remote area.

Like other pay and allowances fixation is made as per the basic pay scales (BPS) as the core to evaluate, the DA is also calculated based on the grades of employees and their scale of pay. The DA is in vogue in a few South Asian countries: India, Bangladesh; and Pakistan.

The Dearness Allowance is paid to the central and public sector government employees and of these sectors retired employees to cover their cost of living.  

What are other pay and allowances?

The pay and allowances of the public sector unit employees and government servants are designed based on the basic pay of a worker.

Those allowances are dearness allowance (DA), house rent allowance (HRA), and in cases of married employees or having dependent parents or both the house rent subsidy (HRS) applies, medical allowance, transport allowance, orderly allowance for senior ranks and managerial positions, hard area allowance for military assignments’ / essential services requirement officials who they are working in remote areas where it is hard to live like in hilly areas having lack of basic amenities for living and leading life in routine, washing allowance, food allowance, daily allowance and travel allowance (TADA) for traveling outside the duty stations other allowances as per the requirement.

It is mandatory to keep in mind that the aforementioned allowances are not all applied to all employees, but as per the grades, seniority, pay scales, and postings.   

How Dearness Allowance is calculated?

Dearness Allowance is calculated as per the below-mentioned method:

DA is calculated twice a year that is in January and July for coping with inflation as the consumer price index rose due to market trends.

The formula for dearness allowance as per in practice in India – (revised in 2006) is:

Central Govt. Employees % of DA = {(Average of the All-India Consumer Price Index (Base year 2001 = 100) for the last 12 months -115.76)/115.76} x 100

Employees of public sector % 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

What are the types of Dearness Allowance?

There are two types of dearness allowance namely:

Industrial Dearness Allowance (IDA):

Industrial Dearness Allowance or IDA is for the employees of public sector employees. This is revised quarterly which is every three months it is revised and it becomes four times a year for the reason to help offset the effect of inflation level rise based on the consumer price index (CPI) which is trendy due to global oil and commodity prices unpredictability. 

Variable Dearness Allowance (VDA)

Variable Dearness Allowance or the VDA is applied to the central government employees. It is done through the revisions bi-annually that is every six months in a year. VDA is to fight against the daily usage of life items price rise and the devaluation of the currency as a result. Variable Dearness Allowance is evaluated as per CPI trends because of worldwide price level fluctuations in fast-moving consumer goods - FMCGs - and other commodities necessary for life. 

VDA is further dependent upon the three below-mentioned factors:

• Base Index - this is fixed for a certain period
• CPI – Consumer Price Index
• VDA amount fixed by the Government

What is the meaning of Dearness Allowance for Pensioners?

 The Dearness Allowance for the Pensioners means that when the government revises the basic pay scales by introducing the increments therein and improves the same for fighting back the inflation rates prevalent worldwide, the employees who are retired get that impact on their Pensions as well. Hence the dearness allowance is improved in pensions for retirees, same as for serving employees, but on certain different percentages as per its feasibility as well as admissibility in the fiscal year (FY) budgets’ revisions on a regular basis.

The FY starts not like the calendar year January to December, rather it starts on the first day of July and ends on the 30th date of June. Hence the fiscal years are represented like 2021-22 which means July-01-2021 till June-30-2022.

What is the difference between the Dearness Allowance and the House Rent Allowance?  

The Dearness Allowance (DA) should not be confused with House Rent Allowance (HRA). The main difference between the two is the latter is provided to both the public as well as private sector employees whereas the former is applicable to public sector government employees only. What is more, the DA and HRA have different tax applications.

The HRA has got its certain tax exemptions that are not available with the DA. The HRA and the DA are calculated at different rates of the percentage of the basic salary – DA at 50% and HRA at 45% of the basic pay.