5% Increase in Dearness Allowance

Before coming to this Dearness Allowance hike update, a simple question comes in the mind of a common man i.e. what is Dearness Allowance?

DA which means Dearness Allowance is a component of salary (if terms of employment so provide) which is paid to central government employees/pensioners to adjust the cost of living. DA is a fixed percentage of an employees’ basic salary. 

The Union cabinet, has increased the dearness allowance for Central Government employees and pensioners by 5% which is a pre Diwali gift for approx 50 lakh government employees and 65 lakh pensioners. This hike is applicable from July, 2019. This is one of the highest hike in DA at one time in history. The present rate of DA will become 17% after hike earlier which was 12%.

The hike in DA is based on recommendation of seventh pay commission

The additional financial implication on account of this increase in Dearness Allowance is estimated at Rs 8590.20 Crore per year; and Rs 5726.80 Crore in the current Financial Year of 2019-20 (for 8 months from July 2019 to February 2020).

Last hike was made in January 2019 wherein government had raised the DA to 12% from 9%.

Dear Allowance/Dearness Relief is revised twice a year from 1st January and 1st July.

Calculation of Dearness Allowance

For Central Government employees:

Dearness Allowance % = [(Average of AICPI (Base Year 2001=100) for the past 12 months -115.76)/115.76]*100

For Central public sector employees after 1/1/2007:

Dearness Allowance % = [(Average of AICPI (Base Year 2001=100) for the past 3 months -126.33)/126.33]*100

Where, AICPI stands for All-India Consumer Price Index.

Tax Implication of Dearness Allowance

As per Income Tax provisions, DA is fully taxable whether forming part of retirement benefit or not. If the employer is provided unfurnished accommodation free of cost, then DA becomes the part of retirement benefit salary which is a component of salary if all conditions are fulfilled.

CA Abhishek Soni

By CA Abhishek Soni

Abhishek Soni is a Chartered Accountant by profession & entrepreneur by passion. He is the co-founder & CEO of Tax2Win.in. Tax2win is amongst the top 25 emerging startups of Asia and authorized ERI by the Income Tax Department. In the past, he worked in EY and comes with wide industry experience from telecom, retail to manufacturing to entertainment where he has handled various national and international assignments.

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