DA Hike: What is dearness allowance? Who are its beneficiaries? How does a DA hike impact Central government employees?

A hike in Dearness allowance (DA) is expected soon for Central government employees. Reports claim that the government may announce a raise in DA after the G20 summit in Delhi, set to take place on September 9 and 10. There has been no official confirmation on the matter so far.

With the release of the latest Consumer Price Index (CPI) data, Central government employees are hoping for a hike in DA to help them tackle inflation. Retail inflation in July jumped to a 15-month high of 7.44 per cent. This is much above the Reserve Bank of India’s target of limiting retail inflation to 4 per cent or lower.

With DA hike once again in the news, here’s a detailed look at the dearness allowance.

What is dearness allowance and who benefits from it?

Dearness allowance is given to Central government employees and pensioners as per the recommendations of the 7th Pay Commission to help their salary keep pace with inflationary trends. This money aids employees to deal with the rising price of goods and services.

Current DA rate and the expected hike

The dearness allowance is revised twice a year, in January and July. The last hike was announced in March. The DA was raised from 38 to 42 per cent. Effective from January 2023, the rate was based on the percentage hike in the 12-monthly average of the All India Consumer Price Index (AICPI) for the term ending December 2022. It is being speculated that the Central government may hike DA by 3-4 per cent. This will take the DA to 45-46 per cent, as per reports. The new rate is likely to be effective from July 1.

The Dearness Allowance Percentage is calculated on the basis of Consumer Price Index average for the last three months (Base Year 2001 = 100)-126.33) multiplied by 100.

How will DA hike impact the salaries of Central government employees?

An increase in dearness allowance will aid Central government employees in adjusting their budget against the rise in inflation. The Provident Fund (PF) and gratuity component of the employees will also see a corresponding rise. The PF and gratuity is calculated based on an employee’s basic salary and DA.

Since DA could increase the overall salary, any hike in the dearness allowance may result in a larger tax liability as well.