What is Dearness Allowance?

Dearness Allowance is a cost-of-living adjustment given to employees to help them manage inflation. Moreover, it is a monetary addition to the basic salary and is calculated as a percentage. Consequently, the Allowance helps maintain the purchasing power of their income as there is an increase in prices. Additionally, it is usually given by governments to their public sector employees and pensioners. Read on to know more about Dearness Allowance in India, who receives an increase and if the Allowance is taxable! 

What is Dearness Allowance in India?

Dearness Allowance in India is an important part of the salary structure for Government employees (central and state) and pensioners.

• In addition, there is an adjustment and moreso increase in their salaries periodically to make up for the rising living costs.
• Furthermore, the Indian Government changes the Allowance rates twice a year, usually in the months of January and July.

In addition, to understand it better, the Dearness Allowance percentage is linked to the All-India Consumer Price Index (AICPI) which is a measure of inflation.

• A higher AICPI means a greater rise in prices, thus leading to a more likely increase in DA to compensate.
• Therefore, there are different formulas for calculating DA for central government employees and public sector undertakings.

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What are the two Types of DA?

Furthermore, here are the two Types of DA:

• Fixed Dearness Allowance: A constant amount added to the employee’s basic salary, regardless of inflation. Moreover, this type of DA is usually offered to employees in industries where the cost of living does not vary significantly.

• Variable Dearness Allowance (VDA): Calculated as a percentage of basic salary and adjusted twice yearly based on the Consumer Price Index (CPI). VDA is further divided into:
  • a. Consumer Price Index-based DA: Calculated based on the CPI, which measures changes in the cost of living over time.
  • b. Industrial Average-based DA: Calculated based on the Industrial Average, which is the average rate of inflation in the industrial sector.

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Who will get Dearness Allowance?

In India, the Allowance is mainly a benefit for public sector employees, such as:

• Central government employees (working and retired)
• State government employees (working and retired)
• Employees of public sector undertakings (PSUs)

Additionally, Private sector employers are not bound to give DA to their employees. However, some private companies might give alike allowances under different names to handle inflation concerns.

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Is Dearness Allowance Taxable?

Yes, Dearness Allowance is a taxable income in India. It is added to the basic salary and other allowances to specify your gross income for tax calculation purposes. Moreover, the Income Tax Act of 1961, regards the Allowance as part of one’s salary. 

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