Centre Hikes DA To 50% On Employees Basic Pay; What Is Dearness Allowance & How To Calculate It?

The Union Cabinet announced a hike in the dearness allowance (DA) to 50% of the basic pay from the current rate of 46%. Effective from January 1, 2024, the decision comes just ahead of the Lok Sabha elections 2024, impacting 48.67 lakh central government employees and 67.95 lakh pensioners.

Union Minister Piyush Goyal, addressing the media after the Cabinet meeting on Thursday, highlighted that the increase of 4 percentage points is intended to compensate for the rising prices. The combined impact on the exchequer due to both Dearness Allowance and Dearness Relief is expected to be Rs 12,868 crore per annum, reaching Rs 15,014 crore during the fiscal year 2024-25.

The adjustments extend beyond the basic DA increase, affecting various allowances and benefits for government employees. Transport allowance, canteen allowance, and deputation allowance have been raised by 25%. Additionally, the house rent allowance (HRA) has seen an increase, moving from 27%, 19%, and 9% of basic pay to 30%, 20%, and 10%, respectively.

Furthermore, benefits under gratuity have been raised by 25%, with an increase in the ceiling from Rs 20 lakh to Rs 25 lakh. This results in an annual burden of Rs 9,400 crore on the exchequer. The decision, based on the recommendations of the 7th Central Pay Commission, is expected to benefit 49.18 lakh central government employees and 67.95 lakh pensioners.

The dearness allowance and relief are revised every six months and are calculated based on the Consumer Price Index for Industrial Workers (CPI-IW), released monthly by the Labour Bureau. The DA percentage for Central Government employees is determined using the formula: ((Average of AICPI for the past 12 months - 115.76) / 115.76) * 100.

Earlier in October 2023, the Union Cabinet had increased the DA by 4% under the 7th Pay Commission, taking it from 42% to 46%. The recent hike is part of the periodic adjustments to counteract the impact of inflation on the cost of living.

Understanding Dearness Allowance
Dearness Allowance (DA) is a cost-of-living adjustment allowance provided by the government to both current and retired members of the public sector. It is determined based on the percentage of the government employee's basic salary and is different for employees in urban, semi-urban, and rural sectors.

The calculation for DA involves the All India Consumer Price Index (AICPI) and is updated regularly. For Central Government employees, the formula is: DA % = ((Average of AICPI for the past 12 months - 115.76) / 115.76) * 100.

There are two main types of Dearness Allowance: Industrial Dearness Allowance (IDA) for public sector businesses and Variable Dearness Allowance (VDA) for central government employees. IDA is adjusted quarterly based on changes in the Consumer Price Index, while VDA is revised every six months.

Dearness Allowance is also subject to income tax, and salaried employees must pay taxes on it. It is considered part of the wage for tax purposes, and tax liability must be disclosed in the submitted forms.

The role of Pay Commissions in DA calculation is crucial, as they reassess public sector workers' salaries, including the Dearness Allowance, and have the authority to review and modify the multiplication factor.

For pensioners, the DA adjustment is made whenever there is an increase, aligning their pensions with the changes. The recent hike in DA, announced by the Union Cabinet, is a welcome relief for over 50 lakh Central Government employees and approximately 55 lakh pensioners.