In a recent development, the Union Cabinet has approved a significant increase in the Dearness Allowance (DA) and Dearness Relief (DR) for Central government employees and pensioners under the 7th Pay Commission. This decision, coming amid the ongoing festive season, is being hailed as an early ‘Diwali gift’ for a substantial number of beneficiaries, including 48.67 lakh central government employees and 67.95 lakh pensioners.

The key highlight of this announcement is a 4% increment in both DA and DR, which takes the DA rate from the existing 42% to a more substantial 46%. The financial implications of this move will impact the exchequer, with an estimated annual expenditure of ₹12,857 crore on account of the increased Dearness Allowance and Dearness Relief.

The revised dearness allowance is set to take effect from July 1, 2023, and its rate is determined by the All India Consumer Price Index (AICPI) for the period from January to June.

Dearness Allowance (DA) is a critical cost-of-living adjustment provided by the government to public sector employees, while Dearness Relief (DR) serves a similar purpose for central government pensioners. The government regularly revises the DA/DR rates every six months, a strategy to counteract the eroding purchasing power of monthly salaries and pension wealth in the face of inflation.

For those curious about the calculation of DA, it is determined as a percentage of the basic salary. In the case of Central Government employees, the formula for Dearness Allowance percent is as follows:

Dearness Allowance percent = ((Average of AICPI (Base Year 2001=100) for the past 12 months – 115.76) / 115.76) * 100

AICPI, which stands for All India Consumer Price Index, plays a pivotal role in this computation. For public sector (central government) employees, the following formula is employed:

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

It’s important to note that the Dearness Allowance paid to employees is fully taxable alongside their salary. The Income Tax Act mandates that the tax liability for both DA and salary must be declared in the filed return.

This move by the government is expected to provide relief and additional financial support to central government employees and pensioners, especially during these festive times. It reflects the government’s commitment to address the economic challenges posed by inflation and its effects on the cost of living for its employees and pensioners.