Dearness Allowance (DA) - Definition, Types & DA Calculation

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Dearness Allowance (DA) - Definition, Types & DA Calculation

A DA or its full form, Dearness Allowance, is a cost of living adjustment the government pays the public sector pensioners and employees. For salaried government employees, it's included as a percentage of their salary. It is a calculated percentage of their basic salary meant to curb the effects of inflation and maintain their living standards.

Since the dearness allowance's meaning directly depends on the employee's base salary, which is based on the cost of living, it's not fixed. So it varies across public sector employees based on their location. In India, dearness allowance is fully taxable and has to be filed under your income tax returns.

What is Dearness Allowance (DA)?

In simple terms, dearness allowance is a sum of money the government pays employees and pensioners as a percentage of their monthly salary. It is a calculated percentage of their salary to offset the effects of inflation.

This amount can vary from employee to employee based on their locations (urban, semi-urban and rural areas). A dearness allowance is only paid to

  • Central Government Employees.

  • Pensioners of Central Government.

  • Public Sector Employees.

This rate/percentage is decided by the Pay Commission in India. They must evaluate and update the salaries of these employees, based on several factors, to make up their final salaries.

A dearness allowance is extended to all government/public employees and pensioners within India and Bangladesh.

Dearness Allowance Rules and Eligibility

Dearness allowance was first introduced after World War II by the government. These rules were ultimately implemented in 1972 after a few revisions. Additionally, service officers covered by the All India Service Act, 1951, are entitled to a dearness allowance as a portion of their basic salaries.

The expand on the previous section, a person should be currently or formerly (retired) employed by one of the three governments, India, Pakistan or Bangladesh, to be eligible for a dearness allowance.

People who work in the public sector are also eligible. Others that are eligible include:

  • Service members qualify for DA under the All India Service Act 1951. However, they must be paid a base, fixed salary.

  • All eligible employees get a percentage of DA in accordance with the All India Service (DA) Rules, 1972. The amount relies on the base pay, but the percentage is the same for everyone.

  • Housing rent that officers have to pay is included in their dearness allowance. The dearness allowance rate determined by the Pay Commission is currently 125%.

  • Pensioners are also eligible for DA payments but will be excluded if they find re-employment within a state, federal, local, or other governmental agency.

  • The DA for bank employees is based on CPI points. The current DA percentage sits at 41.16% from February to April 2023.

The Pay Commission's Role In DA Calculations

The Pay Commission was set up by the Indian government to assess and update the salaries of central government and public sector employees on a regular basis. All the components that form an employee's total salary are considered when making these revisions.

The Pay Commission is fully responsible for salary revisions when considering these components. They also calculate the multiplication factor or fitment factor from time to time.

They've assisted over 60 lakh pensioners and 50 lakh government employees. Therefore, a hike in DA percentages can significantly increase monthly incomes for the public sector and government employees and pensioners.

It should be noted that the government has no control over the fluctuating price of commodities, so a dearness allowance is paid as a precaution against inflation.

The 7th Pay Commission

The 7th Pay Commission was established by the central government on 8th February 2014. They create a Pay Allowance every ten years to update their employees' payscale and to preserve their living standards. So employees of central government offices are eligible for benefits under DA.

Remember that the DA rate can change due to various living circumstances and expenses between rural and urban areas.

Former central government employees receiving pensions are qualified to get a dearness allowance and benefits.

The government also suggests that its employees get a DA rate equal to 125% under the 6th Central Pay Commission (CPC).

Current DA Rates

As of 1st January 2023, the dearness allowance rates were hiked by 4% from the current 38% under the 7th Pay Commission. So the current rate for the dearness allowance by the central government sits at 42%. This increase will benefit nearly 48 lakh central government employees and 70 lakh pensioners.

These rates are also subject to change twice a year. The central government increases this allowance every six months. So the changes would be introduced on 1st January, in the first half from January to June, and on 1st July from July to December.

How This Affects Minimum Wage:

The 7th Pay Commission has also increased the minimum wage for government employees from ₹18,000 to ₹26,000 for entry-level wages after the presentation of the Union Budget 2023.

This is in accordance with the 4% hike in DA rates and the demand from government employees to raise the fitment factor (a multiplication number multiplied by the basic pay) to 3.68 from 2.57.

The base pay initially sat at ₹7,000; with the 7th Pay Commission recommending a common fitment benefit of 2.57, that base pay was raised (2.57 times the basic pay of the 6th Pay Commission) to the current ₹18,000.

With a 3.68 fitment factor, the base pay of ₹18,000 will be increased to ₹26,000.

Furthermore, with the introduction of the 7th Pay Commission, a new class-1 officer's base pay will sit at ₹56,100. So a class-1 officer will be paid three times more than an entry-level employee as their wage structure displays a compression ratio of 1:3:12.

Dearness Allowance For Pensioners

Whenever the Pay Commission introduces a new salary structure, it is reflected in the pension payments of retired government employees. So when the dearness allowance is changed, the pensions for retired employees also get revised. This change/revision is applicable for both family pensions and individual pensions.

Pensioners having chronic conditions can also consider applying for health insurance policies or critical illness insurance if they are worried about rising inflation rates and medical expenses. So, a health insurance plan paired with a DA should ease any worries you may have about prematurely depleting your savings.

If pensioners are re-employed, they may not get a dearness allowance if it's given on a fixed pay or time scale. However, in some cases, re-employed pensioners might get a dearness allowance that is limited to their last drawn pay.

Note that dearness allowance is not paid to pensioners residing outside of India if they are re-employed. Pensioners who reside abroad without re-employment, however, do qualify for DAs on their pensions.

Types Of Dearness Allowance

There are two types of dearness allowance offered to employees in India, they are

Variable Dearness Allowance (VDA): Also known as central dearness allowance (CDA), it's given to central government employees and is based on recommendations from the 7th Pay Commission. The VDA/CDA rate is revised twice a year and is dependent on these factors:**

Consumer Price Index (CPI): Stays fixed for a specific time frame.

Base Index: Changes every month, directly impacting VDA.

Variable DA Amount Fixed By The Government: Stays fixed unless the government revises minimum wage amounts.

**Unlike the Variable DA Amount and base index that remain fixed, the CPI changes every month and directly impacts the overall value of the dearness allowance.

Industrial Dearness Allowance (IDA): It's offered to employees working in Private Sector Undertakings (PSUs). The rate of DA is determined by the Department of Public Enterprises (DPE). It is revised quarterly (four times a year, every three months) based on the All India Consumer Price Index (AICPI). The IDA rates are also different for each quarter in a financial year.

How Is Dearness Allowance Calculated?

These are the current formulae to calculate dearness allowance rates after the changes implemented in 2006. Working government employees would have their fixed basic salaries under these consultations:**

For Central Government Employees:

Dearness Allowance Percentage = ((Average of AICPI (Base Year - 2001=100) for the last 12 months -115.76)/115.76) *100

For Public Sector Undertaking (PSU) Employees:

Dearness Allowance Percentage = ((Average of AICPI (Base Year - 2001=100) for the last 3 months -126.33)/126.33) *100

Note: AICPI - All-India Consumer Price Index.

For example, if a central government employee's base salary is ₹23,500 per month. At 38%, his dearness allowance would be ₹8,930. After the 4% hike, at 42%, his dearness allowance will be ₹9,870. So their salary would have been raised by ₹940 in accordance with the 4% hike for a pensioner with a basic pension of ₹40,100 per month. At 38%, the dearness allowance would be ₹15,238. With the 4% hike, the DA amount increases to ₹16,842 every month. So his pension will be increased by ₹1,604 per month at 42%.

Is Dearness Allowance Taxable?

As we've mentioned before, yes, this amount is fully taxable under the Income Tax Act of 1961, under Section 17(1). When filing their tax returns, employees must declare a tax liability regarding their DA separately.

Having a health insurance policy, however, does make you eligible for tax exemptions under Section 80D of the Income Tax Act.

Suppose employees are provided with rent-free, unfurnished accommodation where all the prerequisites are met. In that case, it becomes a part of the salary up to which it forms the retirement benefit salary of the employee.

Difference Between Dearness Allowance (DA) And House Rent Allowance (HRA)

Remember that DA and HRS are different. They are both included as a part of an employee's salary and exist as separate parts of the salary structure.

Basis Of Comparison  Dearness Allowance (DA) House Rent Allowance (HRA)
Definition  A cost of living amount paid to government and public sector employees by the government as a part of the employee’s salary.   Included as compensation as part of the employee’s salary structure that accommodates rent requirements. 
Eligibility  Only public sector and government employees  Both public and private sector employees.
Tax Exemptions No tax exemptions  Certain exemptions apply
Calculation  Calculated as a percentage of the employee’s base salary by the Pay Commission. Not calculated as a percentage of base pay. It is a component of your salary.

Dearness Allowance Merger

Ever since the changes made in 2006 to the DA calculations, the dearness allowance rate has been steadily increasing for central government employees. Currently, that percentage for central government employees sits at 50% of their basic salary. This is a direct result of inflation and rising dearness rates.

According to the rules, if the dearness rate goes beyond 50%, it has to be merged with the basic salary. This means that public sector employees would get a huge salary hike as other elements of the salary are also calculated on the base salary.

There has been an increasing demand for a dearness allowance merger in recent times as well. The government is expected to announce their verdict on this subject in the near future.


A dearness allowance was introduced primarily to combat the effects of inflation and to maintain employees’ standard of living. It’s an amount the government pays as a percentage of an employee’s or pensioner’s basic monthly salary.

The Pay Commission set up by the central government of India calculates this percentage and is revised regularly. These revisions are also applied to pensioners. While there are no tax exemptions for a dearness allowance, they do exist for health insurance plans.

Tata AIG also provides critical illness insurance plans for the benefit of securing you against the impact of critical illnesses. So government employees with chronic conditions can take advantage of the financial aid they get from both a health insurance plan and a dearness allowance.

Disclaimer / TnC

Your policy is subjected to terms and conditions & inclusions and exclusions mentioned in your policy wording. Please go through the documents carefully.

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