What Is Dearness Allowance? How is it calculated? Everything you need to know

On March 30, the Union Cabinet had announced its decision to increase the Dearness Allowance (DA) for government employees by 3 per cent to 34 per cent of the basic salary. This hike in DA for government employees will be with effect from January 1, 2022. 

The government added that the increase is based on the recommendations of the 7th Central Pay Commission.  

But what exactly is this Dearness Allowance that is given to government employees? 

Dearness Allowance is a component of the salary of government employees and pensioners that is aimed at compensating them for the increase in the cost of living as a result of inflation. The DA is hiked twice a year - in January and July. 

Is DA same for all government employees? 

However, the DA is not the same for every government employee across India. It can differ significantly based on job location, department and seniority among other things. DA is completely taxable for salaried workers. 

How is DA calculated? 

Since DA is meant to offset the impact of inflation on government employees, its increase is determined by the Consumer Price Index (CPI). The CPI is a measure of the average change in prices over time that consumers pay for a basket of goods and services. 

According to online marketplace BankBazaar this formula is used to calculate DA for central government employees; 

Dearness Allowance % = ((Average of AICPI (Base Year 2016=100) for the past 12 months -115.76)/115.76) *100

Here AICPI stands for All India Consumer Price Index.

For public sector (central government) employees this formula is used: 

Dearness Allowance % = ((Average of AICPI (Base Year 2016=100) for the past 3 months -126.33)/126.33) *100

Earlier, DA was calculated suing CPI with the base year 2001. However, in September 2020, it was changed to CPI with the base year 2016. 

Also read: Dearness Allowance for govt employees increased by 3%