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Things About Dearness Allowance Tax Implications You Must Know

Employees receive a raft of benefits from their employers in the form of benefits and allowances. These allowances and perquisites are all for different purposes. And one of the most popular allowances, as far as salary structure is concerned, is the dearness allowance. Let’s get to know the dearness allowance meaning along with its tax implications.

Dearness Allowance

It is highly likely that you would have come across the term dearness allowance at some point or the other. As per the dearness allowance meaning, The allowance is paid to employees to help them cope with inflation. The government considers the cost of living index to calculate the dearness allowance and it is usually a fixed portion of your basic salary.

Your basic salary, along with other allowances and perquisites is known as the gross salary. Since there is a constant increase in inflation, it can become a bit difficult for employees to manage their expenses. The presence of dearness allowance is helpful in curbing the impact of inflation to a large extent.

While trying to understand dearness allowance meaning, it is important to know that the impact of inflation on an individual primarily dictates the dearness allowance calculation. Thus, it varies from one individual to another and is dependent on the locality as well. The dearness allowance for a rural area would be different from that of an urban area or that of a semi-urban area.

Taxation on Dearness Allowance

A part of dearness allowance meaning also includes knowing its impact on your taxes. The Income Tax Act of 1961, which governs all taxes, makes it mandatory for taxpayers to declare their tax liability when it comes to dearness allowances. This can be done while you are filing your tax returns.

The dearness allowance component that you receive is entirely taxable for salaried individuals. There is a possibility that the employee is provided with unfurnished accommodation that is rent-free. In such cases, it becomes that part of the salary which then becomes a retirement benefit for the employee. The employee must meet a few prerequisites for the same.

As per the Income Tax Act, you must separately mention the dearness allowance in your income tax returns and not as a part of your gross income. And it is mandatory to do so.

Types of Dearness Allowance

Another part of knowing dearness allowance meaning is understanding the different types of DA that are available.

  • Variable Dearness Allowance

Variable dearness allowance is applicable only for central government employees. The variable dearness allowance is reviewed by the government once every 6 months and it depends on the consumer price index.

It has three different components, namely base index, consumer price index, and variable dearness allowance. The variable dearness allowance component remains fixed unless the minimum wages are increased or decreased by the government. The base index, another component, also remains fixed and does not see frequent changes. However, the consumer index changes every month and that majorly defines the variable dearness allowance.

  • Industrial Dearness Allowance

The industrial dearness allowance is provided by the government for the employees of its public sector companies. The government reviews the rate of industrial dearness allowance once every quarter, based on the consumer price index.

Changes in Dearness Allowance Rates

One of the major reasons for introducing dearness allowances was to help employees cope with inflation. Since inflation is largely dependent on the cost of living index, it varies from one place to another. Thus, the index could be different for someone who is living in a rural area versus someone who lives in an urban area.

To help the employees better manage inflation, the government reviews the dearness allowance once every 6 months and increases the amount. The changes usually take place on the 1st of January up to the period of 1st of June and again from the 1st of July up to the end of December.

For example, the government hiked the dearness allowance in January 2020. The rate was increased to 164% of the basic salary for central government employees as well as central autonomous bodies employees.

Central government employees saw another hike in dearness allowances on 1st July 2021, where it was increased to 189% of the basic salary.

Dearness Allowance for Pensioners

An individual who has retired and is receiving pension benefits from their employer is known as a pensioner. Central government employees who retire from their jobs, also receive individual or family pensions.

The pension that retired central government employees receive has a dearness allowance component. Thus, any changes to the dearness allowance impact the pension of pensioners as well.

Also, it is important to note that dearness allowance is only for government organizations. If you move out from a government organization into the private sector, you will not receive any dearness allowances as a part of your salary compensation.

The above-mentioned things about dearness allowance meaning are everything you need to know.

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