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Dearness allowance (DA), is paid to salaried employees to counterbalance the impact of consumer price inflation. This dearness allowance has been raised by 3% benefitting about 47.68 lakh Central Government employees and 68.62 lakh pensioners. Yes, a hike in this allowance especially during the time of mounting inflation globally, seems a much-needed help for salaried employees, however, other hosts factors need to be taken into consideration about DA, especially taxes.
Starting this year, from January 1, DA to central government employees and dearness relief to pensioners have been increased by 3% to 34% from the previous 31% of the Basic Pay/Pension, to compensate for the price rise. This hike is following the accepted formula, which is based on the recommendations of the 7th Central Pay Commission. The government will bear a cost of ₹9,544.50 crore per annum on the hike in DA.
DA is paid by the government to help employees cope with stubbornly rising prices. India's CPI inflation has hit an eight-month high of 6.07% in February this year, which has already breached RBI's upper-limit target of 6%. Such would be the second time in a row this year that inflation has crossed over RBI's upper threshold for the economic indicator. Inflation has spiked due to the rise in the food basket.
How does a hike in dearness allowance help an employee?
As per ClearTax, dearness allowance is one of the components of the monthly salary paid only to public sector employees in addition to their basic salaries. The government has increased the dearness allowance percentage for central government employees and pensioners from 31% to 34% with retrospective effect from 1st January 2022.
ClearTax explains that the government pays the dearness allowance to offset the increase in the cost of living due to inflation. The impact of inflation varies according to the location. Thus, the dearness allowance varies from employee to employee based on their job location and job level.
For example, if an employee is in matrix level 1 (1800 GP) then his or her basic salary comes at ₹18,000 per month while taking into consideration the hike of 3% in DA then the employee's dearness allowance rises to ₹6,120 ( ₹18,000 X 34% / 100) from January this year. While dearness allowance of 31% on basic pay of ₹18,000 will come at ₹5,580 ( ₹18,000 X 31%/ 100) per month. Thereby, due to a 3% hike in DA to 34%, employees' salary rises by ₹540.
The DA gets higher with the level of the matrix. For instance, in matrix level 2 (1900 GP), the basic salary is ₹19,900 per month - that means at 34% the DA goes up to ₹6,766 per month ( Rs19,900 X 34%/100) compared to 31% which takes DA to ₹6,169 per month ( Rs19,900 X 31%/100) - a rise of ₹597 per month. For newly recruited Class I officer, the basic salary is ₹56,100, which leads dearness allowance to ₹19,074 per month at 34% compared to ₹17,391 per month at 31%, resulting in a rise of ₹1,683 per month.
There are two separate categories divided into dearness allowance namely Industrial Dearness Allowance and Variable Dearness Allowance.
The industrial dearness allowance applies to public sector employees of the central government and it undergoes quarterly revisions based on the Consumer Price Index (CPI) to offset the effect of soaring inflation. On the contrary, variable dearness allowance is meant for central government employees and is calculated every six months depending upon the CPI to balance out the impact of higher inflation.
Moreover, pensioners, are retired employees of the central government eligible for either the individual or family pension from the Centre.
ClearTax highlights that every time the Pay Commission rolls out a new salary structure, the change is also reflected in the pension of the retired employee. Likewise, if the Dearness Allowance is changed by a particular percentage, the pension of the retired personnel is revised accordingly.
It is the Pay Commission that is responsible for evaluating and making necessary changes in the salaries of public sector employees based on several components that make up an employee's final salary. Hence, dearness allowance is also taken into consideration by the Pay Commission.
What are the tax rules on Dearness Allowance?
Notably, dearness allowance is fully taxable with salary. ClearTax explains that Dearness Allowance is completely taxable for individuals who are salaried employees. Further, the income tax rules in India require the dearness allowance component to be mentioned separately in the ITR to be filed.
If the employee has been provided with an unfurnished rent-free accommodation, it becomes that part of the salary up to which it forms the retirement benefit salary of the employee, provided that all other pre-conditions are met, ClearTax said in its report.
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