Dearness Allowance (DA) is an extra amount of money, which employers pay to their employees as an additional compensation over and above their regular salaries to help them in dealing with the mounting cost of living. It is normally a percentage of their basic salary and can be adjusted according to CPI or any other inflation measures, that are used to adjust the salaries. One of the main goals of DA is to keep employees’ purchasing power from declining in real terms due to rising inflation rates. It enables them to afford the same amount of goods and services as before. DA in other words represents a monthly bonus paid to employees to counter inflationary pressure.
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How to calculate Dearness Allowance?
Dearness Allowance (DA) is a component of a person’s salary that is adjusted to counteract the effects of inflation. It’s calculated as a percentage of the basic salary and is periodically revised by the government or an organization. Here’s how you can calculate Dearness Allowance step by step:
Formula: The DA is generally computed using the CPI indexes of the whole country (All India CPI). The formula for calculating DA is typically:
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DA = [(CPI for the last 3 months – Base CPI) / Base CPI] × 100.
The CPI that serves as the base for DA calculation is referred to as Base CPI.
Get the Required Data: To have this data, you need the following;
Base CPI: This is the Consumer Price Index (CPI) in the base year, which is selected as the base for DA computation.
Average CPI for the last 3 months: This figure is the average of the CPI for the past three months. CPI data can be obtained from government sources or the websites of research institutes specializing in economics.
Calculate the Average CPI for the Last 3 Months: Now, add the CPI figures for the previous three months and then divide by 3 to get the average.
Substitute Values into the Formula: Input the values that you’ve got into the formula:
DA% = ((Average CPI of the past 3 months – Base CPI) / Base CPI) * 100
Calculate the DA Percentage: From the Base CPI subtract the Average CPI of the last 3 months, and the result divided by the Base CPI, multiplied by 100, to get the DA percentage.
Example Calculation:
For instance, a Base CPI of 150 and an average CPI of 160 for the last three months.
DA % = (160 – 150) / 150 * 100.
= (10 / 150) x 100
= 6.67%
This way, the DA would be 6.67% of the basic salary in this illustration.
Apply DA to Basic Salary: Once, when you get the DA percentage, you can utilize it to the basic salary. This can be illustrated using the same example. If the basic salary is $1000, then the DA is 6.67%, and therefore DA amount would be 6.67% of $1000 which is $66.7.Â
Types of Dearness Allowance
1. Central Dearness Allowance (CDA):
It is to be noted that central dearness allowance applies to employees working in the central government departments, ministries and institutions. It is done by the Central Government of a country and can be revised from time to time based on the committee’s recommendations or a pay commission’s suggestions.
2. State Dearness Allowance (SDA):
State Dearness Allowance is an allowance that is available to workers of state government bodies and organizations. In each state government, SDA is set and revised by the government independently, according to the economic conditions, inflation rate, etc.
3. Industrial Dearness Allowance (IDA):
The Industrial Dearness Allowance is an industrial employee benefit that is available for those who work in manufacturing, mining, and other sectors that come under the industrial employment laws. Generally, it is adjusted whenever there is a rise in the consumer price index (CPI) or any other key economic indicators.
4. Variable Dearness Allowance (VDA):
Variable Dearness Allowance is mostly applicable to some industries or sectors where the cost of living fluctuates remarkably due to seasonal differences or other reasons. VDA is the inflation-adjusted wage and is revised regularly to take into account the cost of living index changes, thus allowing employees to earn a wage that meets their expenses.
5. Special Dearness Allowance:
Some organizations or governments might be inclined to deal with Special Dearness Allowance to provide extra compensation to employees in special situations. Such as the case of a DA for employees in remote regions, hazardous settings, or those facing extreme economic hardship.
6. Interim Dearness Allowance (IDA):
Interim Dearness Allowance is an interim allowance given to employees until the finalisation of a new DA structure. It acts as a temporary measure to reduce the inflationary impact on the purchasing power of employees until a new DA which accounts for inflation is implemented.
7. Dearness Relief:
Dearness allowance is an optional DA provided to pensioners and retirees for inflation adjustments in their pension payments. Governments or organizations usually review DR rates at the same time as DA for active employees to ensure pensioners’ financial health.
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FAQs
CDA is the dearness allowance given to central government employees, periodically revised based on several factors, including recommendations from pay commissions.
DA is calculated as a percentage of the basic salary using the formula:Â
DA% = ((Average CPI of the last 3 months – Base CPI) / Base CPI) * 100.
SDA is specific to employees of state government bodies and is set independently by each state government, whereas CDA relates to central government employees.
Special DA is additional compensation provided to employees under unique circumstances, such as working in remote or economically challenging areas.