7th Pay Commission: Is Your Dearness Allowance Taxed? Learn All About DA Calculation Here

The much-anticipated increase in Dearness Allowance (DA) for central government employees and pensioners has just been announced by the administration. The 4% Dearness Allowance hike, which will take effect on July 1, 2022, has made employees happy in time for the holiday season. About 41.85 lakh central government employees and 69.76 lakh pensioners will profit from this.

The Department of Expenditure (DoE) of the Finance Ministry released a document to formalize the most recent 7th Pay Commission rate increase in order to execute the increase. Since the DA was previously 34%, it has been raised by 4% to become 38%. A similar increase in retirees' dearness relief (DR) was also announced by the Cabinet.

What is Dearness Allowance?

Dearness Allowance (DA) is essentially the cost-of-living adjustment benefit provided to both public sector employees and retirees. Conversely, Dearness Relief (DR), which is equivalent to an allowance but is paid to central government retirees, is not an allowance.

How are Dearness Allowance and Dearness Relief Calculated?

The basic pay of government employees and pensioners will increase by 4%. The Department of Expenditure states that the phrase "Basic Pay" in the revised pay structure "means the pay drawn at the prescribed Level in the Pay Matrix as per 7th CPC recommendations accepted by the Government, but does not include any other type of pay, such as special pay" (DoE).

According to the online marketplace BankBazaar, the method used to determine daily allowances (DA) for employees of the central government is as follows. Dearness Allowance percent is equal to ((Average of AICPI (Base Year 2016=100) for the previous 12 months -115.76)/115.76) *100.

AICPI, or the All-India Consumer Price Index, is used here. Employers in the public sector (central government) use the following formula:

Dearness Allowance percent is calculated as follows: ((Average of AICPI (Base Year 2016=100) for the previous three months -126.33)/126.33) *100. Previous to now, DA was calculated using CPI with 2001 as the base year. However, it was changed to CPI with 2016 as the base year in September 2020.

Why is DA/DR Hiked?

Every six months, the government updates the DA/DR rate. This is done to make up for the monthly salary/pension wealth's reduced purchasing power brought on by inflation.

Are DA/DR Taxed?

Employees' DA is fully taxable together with their salary. According to the Income Tax Act, tax liabilities for DA and salary must be disclosed in the filed return.