4 Benefits Of Dearness Allowance You Must Know

There are different components in your salary structure and each of them has a reason to be there. These allowances and perquisites provided by employers help employees to meet different types of expenses. And in almost all the cases, the allowances are apart from the basic salary that employees receive. The basic salary along with different allowances and perquisites is known as the gross salary.

A common allowance that most employers pay to their employees is Dearness Allowance. Here is everything that you need to know about dearness allowance meaning, along with some of its benefits.

Dearness Allowance

If you are looking for a dearness allowance meaning, it is an allowance that helps employees offset inflation. The government pays the dearness allowance to its pensioners and public sector employees (PSEs). The government considers the cost of living index to calculate the dearness allowance. Usually, it is a fixed percentage of your basic salary.

And it is a part of the total salary of central government employees. It might be difficult for employees to cope with inflation and rising costs. Thus, the dearness allowance helps them to keep up with these rising costs of living. 

The calculation for dearness allowance is carried out on the basis of inflation impact on an individual based on their location. Thus, a dearness allowance would vary for all the employees. The allowance would vary if you are in a rural area versus in an urban area versus a semi-urban area. Also, it is mandatory to declare your tax liability as far as dearness allowance is concerned, when you file your taxes. 

Calculation of DA

While trying to understand dearness allowance meaning, knowing its calculation can be helpful. It is calculated on the basic salary of an individual. And it is calculated twice in a financial year, first in January and then in July. 

The sole reason for introducing the dearness allowance was to keep employees away from the impact of inflation. Thus, by allowing employees to benefit from the allowance a couple of times a year, the government intends to make the lives of its employees a bit easier. 

The formula to calculate dearness allowance was tweaked a bit in the year 2006. Currently, there are two different formulas to calculate dearness allowance. One is for the Central government employees and the other is for central public sector employees. 

  • Dearness Allowance for Central Public Sector Employees

{(All India consumer price index (average across India) – 126.33)/126.33} * 100

  • Dearness Allowance for Central Government Employees

{(All India consumer price index (average across India) – 115.76)/115.76} * 100

Benefits of Dearness Allowance

Here are the top 4 benefits of having a dearness allowance as a part of your salary structure, after learning the dearness allowance meaning.

  1. A hike in dearness allowance effectively means a higher take-home salary for central government employees. It is also helpful for retired employees, as they can also see a small hike in their monthly payments. All these changes came into effect on the 1st of January, 2020. 
  2. Changes in the dearness allowance are managed completely by the central government and it impacts over 50 lakh central government representatives and 65 lakh pensioners. A small hike in dearness allowance would make way for a higher monthly payment for pensioners. 

Similarly, for central government employees or for employees that work for government-owned firms, any advance in dearness allowance makes sure a strong take-home salary.

  1. The taxes that the private sector employees pay to account for the wages of the government along with pensions for its current and ex-employees. The TDS that is deducted from your salary, the GST that you pay on the purchase of new electronics, and the higher taxes that you pay on the purchase of fuel, all account for the government’s wages for current and ex-employees.
  2. A lot of calculation for government employees is based on basic salary along with dearness allowance. There are some restrictions when it comes to allowing DA up to a certain threshold. It depends on factors such as the location of an employee or the duration for which the employee is authorized to receive the benefits. Thus, an increase in the dearness allowance would result in more money for current and retired employees.

Taxes on Dearness Allowance

As per the Income Tax Act of 1961, dearness allowance is completely taxable. As per the dearness allowance meaning,  it is the responsibility of the employee to state their tax liability when it comes to dearness allowance while filing their income tax returns.

Should an employee get rent-free accommodation from their employer, then the part of the salary that forms the dearness allowance will be equal to the retirement benefit of the employee.

The idea of introducing a dearness allowance was to ensure that the employees are not heavily impacted by inflation. Thus, it largely depends on the cost of living index and is reviewed by the government twice a year. The above should help you get a better understanding of dearness allowance meaning.

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