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.