Employers in the public sector pay salaries to their employees which is divided into various components. One of these components is the Dearness Allowance. Introduced in the World War II, Dearness Allowance or DA was initially known as ‘Dear Food Allowance’. In the initial years, Dearness Allowance was provided to employees by the government as a demand for wage revision was raised. However, later it was linked to the Consumer Price Index. There have been attempts to revise and restructure the percentage of Dearness Allowance by a number of committees in the Central Government.

Payment of dearness allowances becomes even more significant in a country like India, because of the subdivision of various Indian states into villages, towns and cities. This component of the salary takes care of the change in the cost of living, which is highly dependent upon the location of the employee. Especially for government sector employees, job transfers are common and an essential feature. Therefore, dearness allowance becomes all the more significant so as to hedge the inflation cost of living difference and the increasing rate of inflation.

What is Dearness Allowance?

In normal terms, dearness allowance is defined as the cost of living adjustment allowance which the government offers to public sector employees, as well as pensioners of the same. Dearness Allowance is a component of the salary which is applicable to employees in India as well as Bangladesh.

Basically, Dearness Allowance is understood as a component of salary which is a fixed percentage of an employee’s basic salary, which aims to hedge the impact of inflation. Since, this allowance is related to the cost of living, the Dearness Allowance component differs for various employees based on their location. This implies that Dearness Allowance is different for employees working in the urban sector, semi-urban sector and the rural sector.

Present Rate of Dearness Allowance for Central Government Employees

The Union Cabinet Chaired by the Prime minister on Oct 09, 2019 approved to release an additional instalment of Dearness Allowance (DA) to Central Government employees and Dearness Relief (DR) to pensioners w.e.f. Jul 07, 2019 representing an increase of 5% over the existing rate of 12% of the Basic pay/Pension, to compensate for price rise. This increase is in accordance with the accepted formula, which is based on the recommendations of the 7th Central Pay Commission.

Income Tax on Dearness Allowance

Dearness Allowance is fully taxable for individuals who are salaried employees. In case the said employees are offered rent free accommodation by the employer, which is unfurnished, wherein all prerequisites are met, dearness allowance becomes part of the salary to the extent wherein it forms a component of the retirement benefit salary.