What is Dearness Allowance (DA)?

About Dearness Allowance (DA):

• What is it? DA is a cost of living adjustment that the Government pays to public sector employees and pensioners.
• Why is DA paid? To curb the effect of inflation.
• How is DA calculated? 

• It is calculated as a percentage of the basic salary.
• DA for Central Government employees is calculated differently than that of public sector employees.
• The formula to calculate the DA was changed in 2006 by the Government.
• DA % for Central Govt Employees  = {(All-India Consumer Price Index average (Base year 2001 =100) for the last 12 months -115.76)/115.76} x 100
• DA % for Public Sector Employees  = {(All-India Consumer Price Index Average (Base year 2001 =100) for the last 3 months - 126.33)/126.33} x 100
• Since DA is based on the cost of living, this salary component is not fixed. DA varies from employee to employee based on their presence in the urban, semi-urban, or rural sectors.

• Taxability: 

• DA is fully taxable for individuals who are salaried employees. 
• It is compulsory to declare the tax liability concerning DA when filing an ITR.

• Types of DA:

• Variable Dearness Allowance (VDA):

• VDA applies to Central government employees.
• It undergoes revision every six months based on the changes in the Consumer Price Index (CPI).

• Industrial Dearness Allowance (IDA):

• IDA applies to the Public sector employees of the Central Government.
• IDA is revised every quarter based on the changes in CPI.

 

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Q1) What is House Rent Allowance (HRA)?

HRA is the salary component given by an employer to an employee to meet expenses related to the renting of accommodation which the employee takes for residential purposes.  HRA applies to both employees from the private sector as well as the public sector.

Source: Centre likely to hike dearness allowance by 4% to 42%