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Dearness Allowance (DA)– Understanding its Types and Calculation

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What is DA? Dearness allowance means that all public sector employees, private sector employees, government employees, etc., receive basic salaries and a fixed percentage of their basic salary to balance the increase in living costs. Along with several other allowances, this DA is added to the basic salary in the take-home pay. Thus DA or Dearness allowance is an important part of the monthly salary. So let’s begin with a simple study of DA.

What is Dearness Allowance?

Dearness Allowance or DA means that the government pays its pensioners, employees, etc., a fixed amount as a percentage of the employee’s base salary to balance the inflation impact. The increasing prices are market-dependent and, despite governmental measures used to control the inflation rate, such DA adjustments are needed to offset higher living costs.

DA is location-based and varies over the urban, rural, or semi-urban towns and cities. Thus the effective salary of an employee plus such DA helps offset the increasing prices and is constantly increased with larger cities getting higher dearness allowances than the smaller ones.

How to Calculate DA in Salary?

Employees receive DA to protect against rising prices in a particular FY- financial year. DA is calculated bi-annually or twice a year (i.e., in July and January). The Government changed the DA calculation formula in the year 2006. At present, the DA is calculated by the below formula, as mentioned in the next section.

What is DA in Salary for Central Government Employees?

  • The percentage of DA = {(Average 12 months All-India Consumer Price Index (Base year – 2001 =100) – 115.76) / 115.76} x 100} to express it as a percentage.
  • The formula for the Central Public Sector Employees over a 3-month period is expressed as the  DA % = {(Average of 3 months of the All-India Consumer Price Index (Base year – 2001 =100) -126.33)/126.33} x 100} to express it as a percentage.

How to Calculate Dearness Allowance using a DA Calculator?

Learning how to calculate DA? It is far easier to use a reliable DA calculator to calculate the DA in salary. The calculator has a formula box that includes and calculates the various parts of your salary and is easy to use without referring to several formulae and definitions or updates.

Income Tax Treatment of DA

As per the income tax latest updates, the dearness allowance is a fully taxable allowance for all salaried employees, including the pensioners. If all other conditions are met, and the employee receives an unfurnished rent-free accommodation, the DA part of the salary forming the retirement benefits becomes taxable. The Indian Income Tax Act Rules require the DA part to be separately mentioned in the IT returns filed in a particular FY as a dearness allowance percentage of basic salary or income received under this head.

Also Read: How To Save Income Tax on Income From Salary For Individuals

Types of DA

For DA calculations, the DA component is divided into 2 categories, namely

1. IDA – Industrial Dearness Allowance applies to all Central Government Public Sector employees. This IDA component in the case of public sector employees is revised quarterly and is directly dependent on the CPI or Consumer Price Index. It is basically a tool that helps offset rising inflation levels and their impact on the employee’s salary. 

2. VDA – Variable Dearness Allowance applies to all Central Government employees and is revised every six months. The VDA is also based on the CPI or the Consumer Price Index and helps set off the rising inflation levels and prices. The VDA component is also dependant on the 3 components mentioned below:

  • The BI or Base Index, which stays at a fixed level over a particular period,
  • The CPI or Consumer Price Index, which changes monthly, 
  • The Variable DA percentage fixed by the government till the time the government revises basic minimum wages.

Pay Commissions Role in the DA calculation

Since all salaried people are affected by the rising prices and inflation, the role of the Pay Commission in changing and evaluating DA in the salaries is of crucial importance to the employees. The Pay Commission includes such DA evaluations in each Pay Commission Report preparation. 

  • The Pay Commission accounts for all factors that form in calculating the salaries an d the dearness allowance in the private sector and the dearness allowance calculation for private companies. The reports also undergo periodic reviews for updating the percentage o r DA multiplication factors used in the salary calculations and its DA component.
  • The latest DA hike in 2021 will raise minimum wages for workers in the Union government sectors and its employees. The change includes watch and ward, mines, road construction, ports, oil fields, and employees of Central Government Corporations and applies to casual/contract workers/ employees.

DA for Pensioners

Retired Central Government employees or pensioners eligible for receiving a family/ individual pension are also considered by the government. Whenever the Pay Commission Reports roll out a new employee salary structure, the pensioner’s salary or pension is also affected and reflected. Hence if the Dearness Allowance is revised and pegged at a particular percentage, the pensioner’s benefits are suitably revised too.

Budget 2018 DA changes

In 2018, it was estimated that there were more than 50-lakh employees in the Central Government receiving government salaries and 55-lakh retired employees or pensioners of the Central Government receiving government pensions. The budget set a 2% hike in the DA levels, providing substantial relief to nearly 11 million of these Central Govt. beneficiaries whose DA component of the salary/pension rose from 5 to 7%. It is expected that the latest hike in 2021 in DA will favourably affect nearly 61.17 lakh pensioners and 48.41 lakh employees of the Central Government.

DA and HRA Differences

Common questions generally confuse readers who are unable to explain what is HRA and DA. The DA component is not be confused with the House Rent Allowance or HRA. These 2 components are separate and treated differently as per the Income Tax Act 1961 and its rules. 

House Rent Allowance or HRA is a salary portion given to the employee to meet rental housing expenses. HRA is given to public/private sector employees for meeting the need of renting a house.  But the employer provides DA so that the employees can keep up with the costs of living. In addition, the HRA is partially taxable, whereas DA is fully taxable. 

DA Merger

The DA for Central Government and Public Sector employee’s salary is affected by the DA changes and used in salary calculation formulae. The salaries have been rising and are presently at 50% of the base salary. There has been a constant revision of the DA annually to offset the adverse effects of rising living costs. Once the DA component rises beyond these levels, the rules require the merger of basic salary and the DA component. When this happens, it increases the salary. Also, note that many salary components are calculated based on the basic salary, and a rise in the basic salary would mean a substantial rise in the gross salary.

Also Read: All About Special Allowance – its Taxation & Calculation in India


Nearly all employees have questions related to dearness allowance meaning, salary calculations, income tax calculations, and basic, gross, net, and CTC salaries. In the article above, we have explained  DA in salary, DA calculation, how salaries get affected by a rise in the DA percentage, the types of DA, its calculations and the role of the Pay Commissions in fixing the DA, Today one can use top-rated apps like the Legaltree app to easily calculate DA and various salary components to help you in recording maintenance, salary and income tax calculations etc. Try it today to understand your DA/ salary better.


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