Know How It Is Calculated, Taxed And All About It

Know How It Is Calculated, Taxed And All About It

The government has recently announced the much-awaited hike in Dearness Allowance (DA) for central government employees and pensioners. The increase in 4 per cent Dearness Allowance, effective 1 July, 2022, has brought cheers for employees ahead of the festive season. This will benefit about 41.85 lakh central government employees and 69.76 lakh pensioners.

In order to implement the hike, the Finance Ministry’s Department of Expenditure (DoE) issued a memorandum to formalise the recent 7th Pay Commission rate hike.

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The DA has been increased by 4 per cent taking the hike to 38 per cent from 34 per cent. The Cabinet also announced a similar hike in dearness relief (DR) for pensioners.

What’s dearness allowance?

Dearness Allowance (DA) is basically the cost-of-living adjustment allowance given to the employees of the public sector as well as pensioners. On the other hand, Dearness Relief (DR) is the same as an allowance but is given to central government pensioners.

How is DA/DR calculated?

The hike of 4 per cent is applicable to the basic pay of government employees/pensioners.

“In the revised pay structure, the term ‘Basic Pay’ means the pay drawn in the prescribed Level in the Pay Matrix as per 7th CPC recommendations accepted by the Government, but does not include any other type of pay, such as special pay,” according to the Department of Expenditure (DoE).

The formula used to calculate DA for central government employees is as below as mentioned by the online marketplace BankBazaar.

Dearness Allowance per cent= ((Average of AICPI (Base Year 2016=100) for the past 12 months -115.76)/115.76) *100

Here AICPI stands for All India Consumer Price Index.

For public sector (central government) employees this formula is used:

Dearness Allowance per cent = ((Average of AICPI (Base Year 2016=100) for the past 3 months -126.33)/126.33) *100

Earlier, DA was calculated using CPI with the base year 2001. However, in September 2020, it was altered to CPI with the base year 2016. 

What happens when DA/DR allowance involves fractions of 50 paise?

The Department of Expenditure said that the payment on account of dearness allowance involving fractions of 50 paise and above might be rounded to the next higher rupee. The fractions of less than 50 paise may be ignored.

What is the reason behind the DA/DR hike?

The government revises the DA/DR rate every six months. This is done to compensate for the loss in purchasing power of the monthly salary/pension wealth due to inflation.

Will DA/DR be taxed?

DA paid to employees is fully taxable with salary. The Income Tax Act mandates that tax liability for DA and salary must be declared in the filed return.