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All you wanted to know about Dearness Allowance

Vivek Ananth | Updated on March 17, 2020 Published on March 17, 2020

Cost of living rises no matter where you live. That’s one of the primary reasons people expect regular salary hikes from their employers. In the middle of a Pay Commission cycle (every 10 years), the Centre compensates its employees for the rise in cost of living by raising the dearness allowance (DA) it pays them.

This is different from the dearness allowance component in the salary of a private sector employee. DA is calculated as a proportion of the basic salary. The government recently increased DA by four percentage points to 21 per cent of the basic salary for its employees and pensioners. This follows a hike last October.

What is it?

DA is an allowance that every government employee gets and is calculated as a proportion of the basic salary. Increases in the allowance is usually announced every six months with effect from January 1 for the January-June period and from July 1 for the June-December period.

The announcement of the hike in DA and the payout is usually done in March (for January-June) and September (for July-December). The DA is calculated based on a percentage of the basic salary and is part of the other allowances that a government or a government-owned company’s employee gets. The DA is calculated based on the All-India Consumer Price Index (AICPI) for the past 12 months.

The DA portion of salary or pension is frequently merged with the basic amount when it crosses a threshold. This has the effect of the DA being calculated at a higher proportion of the basic salary or pension.

Why is it important?

Think of it as a mini-consumption stimulus. Nearly 50 lakh employees and 65 lakh pensioners stand to benefit from the latest increase in DA by the Centre. That’s over one crore people. For pensioners, every time the DA is increased, it results in an increase in their monthly pension. For serving government employees, and those of government-owned companies, an increase in DA can lead to a substantial increase in their monthly take-home pay.

For government staff, many other allowances are also calculated using basic salary and dearness allowance as a base, with some limitations on how much of the DA will be considered beyond a threshold. This differs for various allowances. It can be based on the kind of location the employee is serving at, or the time period for which the employee is entitled to the allowance. On the whole, an increase in DA puts more money in the hands of both present and former government employees.

Why should I care?

If you are a Central government employee, a hike in DA directly improves your take-home salary. If you are retired employee, your monthly pension will see a slight hike. All these changes are also applicable with retrospective effect from January 1, 2020. This means that you can expect a lumpsum towards arrears for January and February 2020.

If you are with the private sector and a taxpayer to boot, you may not be as happy. It’s your taxes that contribute to the government’s salary and pension bill for its current and ex-employees, DA included. The GST you pay on that new phone, the extra excise duty you now have to cough up on the fuel you use to run your car and the tax deducted at source on your salary or any other payments, are used to finance the inflation-adjusted pay-cheque for the Centre’s employees and pensioners.

Bottomline

No matter what the economic situation, it appears that the government looks after its own.

 

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Published on March 17, 2020
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