India has been trying various measures to reign in the rising inflation and as a result the rising prices of almost all commodities. Most severely hit out of all have been food items and as such people have been hit the most by food inflation. Considering the fact that inflation is a result of movement of the market, government understands that it can only take measures to a certain extent in order to curb it. However, people need to be shielded from the extreme effect of rising prices and thus Dearness Allowance or DA becomes an important player
Salary paid to employees by employers from the public sector is segregated into various components. One of these components is dearness allowance. The concept of dearness allowance or DA was introduced after the Second World War when it was known as ‘Dear Food Allowance’. Initially DA was granted by the government owing to the demand for wage revision by employees. However, later it was linked to the Consumer Price Index. Various committees in the central government have been responsible for restructuring and re-evaluation of DA percentage for various financial years.
In a country like India, payment of DA becomes even more significant owing to the subdivision of various Indian states into cities, towns and villages. The DA component takes care of the change in the cost of living depending upon the location of the employee. Specially, for government sector employees, job transfers are an essential feature and hence DA becomes even more significant in order to hedge the inflation cost of living difference as well as inflation.
What is Dearness Allowance?
Dearness Allowance is cost of living adjustment allowance which the government pays to the employees of the public sector as well as pensioners of the same. DA component of the salary is applicable to both employees in India and Bangladesh.
Dearness Allowance can be basically understood as a component of salary which is some fixed percentage of the basic salary, aimed at hedging the impact of inflation. Since, DA is directly related to the cost of living, the DA component is different for different employees based on their location. This means DA is different for employees in the urban sector, semi-urban sector or the rural sector.
Calculation of Dearness Allowance:
After the Second World War, DA component was introduced by the government. After 2006, the formula for calculating dearness allowance has changed and currently DA is calculated as follows,
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:
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.
From the year 1996, DA has been included to compensate for price rise or inflation in a particular financial year and hence it is revised twice every year, once in January and then in July.
What is Industrial Dearness Allowance?
Industrial dearness allowance or IDA is the allowance applicable to employees of the public sector enterprises. Recently, the government of the India has increased IDA by 5% for this sector. This decision is set to benefit all board level executives, officers and employees of central PSUs.
IDA for government sector enterprises is revised quarterly based on the movement of the Consumer Price Index (CPI) in order to compensate for the rising inflation in the country.
Variable Dearness Allowance:
VAD or Variable dearness allowance is the allowance that comes as a result of revision every six months for central government employees. The changed new figure that is received as a result of taking into consideration the increase or decrease in the Consumer Price Index, CPI, is termed as Variable dearness allowance. Based on this figure, the DA of employees is revised and rolled out.
There are three components that make up VAD. First is the consumer price index, second, the base index and third is the variable DA amount fixed by the government of India. The third component remains fixed until the government revises the minimum wages. Same way, base index also remains fixed for a particular period. Only the CPI or Consumer Price Index changes every month and affects the overall value of the variable dearness allowance.
Dearness Allowance Merger:
Since the year 2006, the dearness allowance for employees from the public sector has been continuously growing. The figure currently stands at 50% of the basic salary. This has happened over a number of years during which the DA percentage rose steadily in order to hedge the rising inflation.
As a rule, it is practice to merge the DA with the basic salary once the DA percentage breaches the 50% mark. This is supposed to be a great salary booster for employees since all other components of the salary are calculated as a percentage of the basic salary. Demands for merging the DA with the basic salary have been with the government for quite some time. The union cabinet is expected to take a decision on this matter soon. In the meantime, employees from the public sector are ecstatic with anticipation of a merged DA which would mean a major hike in their salaries.
Role of Pay commissions in modifying DA:
Every subsequent pay commission in India is expected to revaluate the salary of employees of the public sector taking into account the various components of salary. Dearness Allowance too, is taken into account for rolling out the next pay commission report. Pay commissions take into account all the factors that feed into the calculation of salaries of personnel in the public sector. Reviewing and changing the multiplication factor also comes under the purview of the pay commissions.
Dearness Allowance for Pensioners:
Every time a new salary structure is rolled out by a pay commission, the pension for retired employees of the public sector is also revised. Same is the case with Dearness Allowance; every time DA is increased by a certain percentage, the same change gets reflected in the pensions of retired public sector employees. This applies to both regular pension as well as family pension.
Difference Between DA and HRA?
DA or dearness allowance is calculated as a specific percentage of the basic salary which is then added to the basic salary along with other components like HRA (House Rent Allowance) to make up the total salary of an employee of the government sector.
HRA or House Rent Allowance is the salary component given by an employer to an employee in order to meet expenses related to the renting of accommodation which the employee takes for residential purposes. HRA is applicable to both employees from the private sector as well as the public sector whereas DA is majorly applicable to employees working in the public sector.