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The dearness allowance is the cost of living adjustment paid by the government to the employees of the public-sector units. It is calculated as a percentage of the basic salary. In this comprehensive guide by H&R Block India, dearness allowance has been explained.

Dearness Allowance in India

Last Update Date : June 26, 2018

dearness allowance

Following the second world war, dearness allowance came into picture, then known as Dear Food Allowance. Today its linked to the consumer price index, however initially it was given in response to the demand for wage revision by the employees. In India it was the textile industry in Bombay which introduced DA scheme. The government of India gives all the public sector employees, a certain amount to compensate the effect of inflation. This very amount is referred to as the Dearness Allowance. Let us understand DA in a broader sense.

What is Dearness Allowance?

Dearness allowance is a cost of living adjustment paid to the government employees and pensioners of the same. DA is calculated as a component of basic salary. This component differs according to the location of the employee. It essentially compensates the difference in cost of living in different states and areas in India. As a result, it is different for the urban and rural sector. DA is also given with an aim to cushion the effect of inflation.

How to Calculate Dearness Allowance?

DA is calculated as a percentage of (basic pay + grade pay). After 1/1/2006 the calculation of DA for government employees is as follows:

Dearness Allowance Percentage = {[Average of AICIP (Base year 2001 = 100) for the past 12 months – 115.76]/115.76} x 100

Formula for calculating DA for Central public-sector employees after 1/1/2007 is:

Dearness allowance Percentage = {[Average of AICIP (Base year 2001 = 100) for the past 3 months – 126.33]/126.33} x 100

AICIP stands for All India Consumer Price Index

Beginning 1st of January 1996, the dearness allowance is granted to compensate for price increases to which the revised pay scales relate. This will be reviewed twice a year, on 1st January and 1st July.

Industrial Dearness Allowance

Industrial Dearness Allowance or IDA is the dearness allowance applicable to the employees of public sector enterprises. Recently the government has increased the IDA by 5% to every board employee, officers and executives of the central PSUs. In order to compensate for the increasing inflation rate, IDA is revised quarterly based on the movement of the consumer price index.

Variable Dearness Allowance

Variable dearness allowance is for central government employees and is revised every six months. It is the allowance that comes as a result of considering the change in the consumer price index. The new revised new figure is called VDA. VDA has three components. First is the consumer price index, second is the base index and third is the variable dearness allowance amount fixed by the government of India. The third component remains fixed until the government revises the minimum wages. The base index also remains fixed. Only the CPI changes every month and affects the overall value of the VDA.

Dearness Allowance Merger

Currently, the DA for employees of public sector units is 50% of the basic salary. The figure had been growing since 2006. It is a rule to merge the DA with the basic salary once it reaches the 50% bench mark. This is supposed to be a great salary booster for employees since all the other components of the salary are calculated as a percentage of the basic salary.

Dearness Allowance for Pensioners

Whenever a new salary structure is rolled out by a pay commission, the DA component also changes. Along with this, the pension for the retired employees is revised as well as the DA for retired employees. This is applicable to both regular pension as well as the family pension.

Pay Commissions

Dearness allowance is one of the components taken into account while restructuring the pay. Pay commissions revaluate the salary of the employees of the public-sector units considering all the components that feed into the calculation of salary. Reviewing and changing the multiplication factor also comes under the purview of the Pay Commissions.

Latest updates related to Dearness Allowance

The Union Cabinet has increased the dearness allowance for its 11 million employees and pensioners to 7 per cent from 1 January 2018. This also states the increase in dearness relief for pensioners by 2 per cent.

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