The high cost allowance (DA) is paid to employees to offset the impact of consumer price inflation. This dearness allowance was increased by 3% to benefit about 47.68 lakh central government employees and 68.62 lakh pensioners. Yes, an increase in this allowance, especially during the time of rising inflation globally, seems a much needed help for salaried employees, however, other host factors need to be considered about DA , especially taxes.
From this year, from January 1, AD to central government employees and high cost relief to retirees have been increased from 3% to 34% from the previous 31% of base salary/ pension, to compensate for the rise in prices. This increase follows the accepted formula, which is based on the recommendations of the 7th Central Wage Commission. The government will bear a cost of ₹9,544.50 crores per year when hiking in DA.
DA is paid by the government to help employees cope with the stubborn rise in prices. India’s CPI inflation hit an eight-month high of 6.07% in February this year, which has already exceeded the RBI’s upper bound target of 6%. It would be the second time in a row this year that inflation has crossed the upper RBI threshold for the economic indicator. Inflation has skyrocketed due to the increase in the food basket.
How does an increase in dearness allowance help an employee?
According to ClearTax, the dearness allowance is one of the components of the monthly salary paid only to public sector employees in addition to their base salary. The government has increased the percentage of the high cost allowance for central government employees and retirees from 31% to 34% with retroactive effect from January 1, 2022.
ClearTax explains that the government pays the dearness allowance to compensate for the increase in the cost of living due to inflation. The impact of inflation varies by location. Thus, the dearness allowance varies from one employee to another depending on his place of work and his level of employment.
For example, if an employee is at level 1 of the matrix (1800 GP) then his base salary is ₹18,000 per month taking into account the 3% increase in AD then the employee’s high cost allowance increases to ₹6,120 ( ₹18,000 X 34% / 100) from January of this year. While the dearness allowance of 31% on the base salary of ₹18,000 will come to ₹5,580 ( ₹18,000 X 31%/ 100) per month. Thus, due to a 3% increase in the DA to 34%, the salary of employees increases by ₹540.
The DA increases with the level of the matrix. For example, at level 2 of the matrix (1900 GP), the base salary is ₹19,900 per month – this means that at 34% the DA goes up to ₹6,766 per month (Rs19,900 X 34%/100) against 31% who take DA at ₹6,169 per month (Rs19,900 X 31%/100) – an increase of ₹597 per month. For newly recruited Class I officers, the base salary is ₹56,100, which leads the high cost allowance to ₹19,074 per month at 34% vs. ₹17,391 per month at 31%, an increase of ₹1,683 per month.
There are two distinct categories divided into dearness allowance, namely industrial dearness allowance and variable dearness allowance.
The Industrial Highness Allowance applies to central government public sector employees and is subject to quarterly revisions based on the Consumer Price Index (CPI) to offset the effect of the surge in the ‘inflation. On the contrary, the variable dearness allowance is intended for central government employees and is calculated every six months according to the CPI to compensate for the impact of higher inflation.
In addition, retirees are retired agents of the central administration eligible either for the individual pension or for the family pension of the Centre.
ClearTax points out that whenever the Pay Commission rolls out a new salary structure, the change is also reflected in the retired employee’s pension. Similarly, if the dearness allowance is changed by a certain percentage, the pension of retired staff is revised accordingly.
It is the Payroll Commission that is responsible for evaluating and making necessary changes to the salaries of public sector employees based on several elements that make up an employee’s final salary. Therefore, the dearness allowance is also taken into consideration by the Remuneration Commission.
What are the tax rules for the Dearness allowance?
In particular, the dearness allowance is fully taxable with the salary. ClearTax explains that Dearness Allowance is fully taxable for people who are employees. Also, income tax rules in India require the dearness allowance component to be mentioned separately in the ITR to be filed.
If the employee received free unfurnished housing, it becomes the portion of salary up to which it constitutes the employee’s retirement salary, provided all other prerequisites are met, ClearTax said in its report. .
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