Dearness allowances is a benefit given to employees to compensate effect of inflation. Dearness allowances was introduced by Government of India, Pakistan and Bangladesh after the second world war It is calculated as a percentage of basic salary Dearness allowance varies from place to place as effect of inflation is not same in all places.
It is available for both working as well as retired employees.
Type of dearness allowance
There are two types – Industrial and variable.
Industrial dearness allowance (IDA) is meant for public sector employees. It is adjusted every quarter by the Government based on changing Consumer Price Index (CPI).
Variable dearness allowance (VDA) is meant for central government employees. There are three components of VDA. First is CPI, second is base index and third is the variable dearness allowance fixed by the Central Government. However, VDA is adjusted every six months by the Central Government based on revision of CPI. The other two components remain fixed until government revise them.
How dearness allowance is calculated?
The formula for dearness allowance (DA) calculation is as below:
For Central Government employees:
DA % = ((Average of AICPI (Base Year – 2001=100) for the past 12 months -115.76)/115.76) *100
For Central public sector employees:
DA % = ((Average of AICPI (Base Year – 2001=100) for the past 3 months -261.42)/261.42) *100
Where, AICPI stands for All-India Consumer Price Index. The number 115.76 and 261.42 are known as DA fitment (linking) factor.
For example, lets assume your basic salary is ₹45,000.
Average AICPI for the last 3 months is 381.6
Therefore DA% = ((381.6-261.42)/261.42*100 = 45.97% and DA amount is ₹20,687.
Important facts about dearness allowance
- While calculating taxable income dearness allowance is also considered along with basic salary.
- Pay commission is the authority to decide upon the modalities of dearness allowance.
- DA is mostly applicable for public sector employees where as HRA is applicable for private well as public sector employees.
- The maximum DA is capped at 50% of basic salary. If the dearness allowance breaches this cap, it is merged with the basic salary. Thereafter DA is paid on the merged basic income. This is decided by the Union cabinet.
- In case of pensioner DA is calculated based on basic pension without commutation. The pensioner gets DA as a specific percentage of his/her original pension.
- On reemployment, an individual is eligible for dearness allowance, while pensioners are not eligible for DA on reemployment.
- Pensioner staying abroad without reemployment are eligible for DA.
Dearness Relief
It is a benefit available for all pensioners of central government. It is managed by the Department of Pension & Pensioners’ Welfare under the Ministry of Personnel, Public Grievances & Pensions. The dearness relief (DR) is calculated on original basic pension before commutation or such basic pension before commutation as revised on implementation of recommendations of Pay Commission etc. and not on the pension as reduced after deduction of commuted pension.
- Under Rule 52 of CCS (Pension) Rules, 2021, DR benefit being given to retired central government employees and family pension beneficiaries is granted to pare the price rise. The benefit includes even those who are drawing compassionate allowance under Rule 41. It is payable half-yearly and central government announced DR allowance along with the Dearness Allowance (DA). Both DA and DR increases in tandem where DA hike is applicable on working central government employees whereas DR hike is applicable on central government pensioners that include family pensioners as well.
- Under 7th Central Pay Commission (7th CPC), existing or current DR rates for central government pensioners is 38 per cent, which is calculated on the basic pension before commutation and not on the reduced pension after commutation. The DR rate of 38 per cent is applicable from 1st July 2022 as central government recently announced 4 per cent DA and DDR hike.