26th September 2021

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Freezing of dearness allowance (DA)

“In view of the crisis arising out of Covid-19, it has been decided that the additional installment of dearness allowance (DA) payable to central government employees and dearness relief (DR) to central government pensioners, due from 1st January, 2020 shall not be paid. Additional installments of DA & DR from 1 July 2020 & 1 Jan shall also not be paid”

– the Ministry of Finance said in a memo.
  • The decision is made to release the future payment of DA and DR from July 2021; the rates will be reinstated prospectively and will be included in the revised accumulated rate effective as of July 1, 2021. The government will not pay any arrears during the period from January 1, 2020 to June 30, 2021.
  • Last month, the Union Cabinet increased DA and DR by 4% from 17% of base salary / pension to 21% of base salary / pension for central government employees and retirees. There are at least 50 Lakh government employees and 65 Lakh retirees. The increase in DA and DR would have cost the treasury Rs. 37.53 billion rupees during the current fiscal year and -2022, by stopping the DA and DR quotas, the central government should generate savings of 25 billion rupees during the 2020-2021 fiscal year.
  • States are expected to save Rs 55 billion between them in the current fiscal year, bringing the total savings to the general government budget in FY 21 to Rs 80 billion. The center and states are expected to save an additional Rs 40,000 crore in fiscal year 22. The government will likely use the savings from the reduction of AD and R&D to meet the additional demand for people’s health and wellness healthcare resources affected by the pandemic.

What is dearness allowance (DA)?

  • After World War II, the government introduced the DA component. The Dearness allowance is the cost-of-living adjustment that the government pays to its employees and retirees (DR). The appreciation allowance can essentially be understood as a component of salary, which is a fixed percentage of basic salary, intended to cover the impact of inflation. Since DA is directly related to the cost of living, the DA component is different for different employees depending on their location. This means that DA is different for employees in the urban, semi-urban or rural sectors. After 2006, the formula for calculating the love allowance has changed and the AD is currently calculated as follows,
  • For Central Government employees: Dearness Allowance % = ((Average of AICPI (Base Year 2001=100) for the past 12 months -115.76)/115.76)*100
  • For Central public sector employees: Dearness Allowance % = ((Average of AICPI (Base Year 2001=100) for the past 3 months -126.33)/126.33)*100.
  • Where, AICPI stands for All-India Consumer Price Index.
  • From the year 1996, DA has been included to compensate for price rise or in a particular financial year and hence it is revised twice every year, once in January and then in July and paid back to the employees and pensioners in the month of March & September.
  • This move comes after the Prime Minister and Members of Parliament (MPs) opted for a 30 per cent salary cut and suspension of MPLAD (Members of Parliament Local Area Development Scheme) fund during 2020-21 and -22. This suspension in the hike is applicable for central government employees and pensioners who will continue to receive Dearness Allowance at 17 per cent of their salary or pension. The Union Cabinet had approved a 4 per cent hike to 21 per cent of salaries and pensions in March of this year. The memorandum also states that no arrears will be paid for the period from January 1, 2020, to June 30th, 2021.
  • At the Union government’s level, around 8.5 per cent of the total Union budget is used to pay the salaries of Central government employees. At the state level, it ranges from 30 per cent of the total budget in states like Uttarakhand, Jammu and Kashmir and Assam to 12 per cent in states like Bihar and Uttar Pradesh.In 2019-20, the Union government was expected to spend Rs 1.74 lakh crore on pensions. Thus, salaries account for one of the major components of the government’s expenditure budget.  A 2014 report by the Department of Expenditure shows that Dearness Allowance makes for 37.61 per cent of the total expenditure by the Centre on salaries and the expenditure on Dearness Allowance was increased by 40 per cent in 2013-2014 from 2012-2013.
  • Dearness Allowance makes for a large chunk of central and state government’s expenditure on salaries. It has doubled over the last year – from 9 per cent to 12 per cent in January 2019; from 12 to 17 per cent in October 2019. The rates of Dearness Allowance were increased from 5 per cent to 7 per cent in January 2018; from 4 to 5 per cent in July 2017; and 5 to 7 per cent on January 1, 2018.
  • This fiscal year, the government was expected to spend Rs1,74,300 crore on pensions -which was 4.6 per cent higher than the revised estimate of 2018-19. The Seventh Central Pay Commission recommendations were applicable to 33 lakh central government employees, 14 lakh armed forces and 52 lakh pensioners.
  • Estimates suggest that the deferment could free up about Rs 1 lakh crore in addition to savings from the oil price crash. According to an estimate, every dollar the price of oil drops, India saves approximately $1.5 billion. While a weaker rupee offsets some of those gains, lower oil prices also cool off inflation.  Dearness allowance is usually received by government employees to compensate for rising inflation. The decision announced today will put more money in the hands of government employees and pensioners. The decision has come at a time when is in bad shape. Previously, DA was hiked by the Union Government in October 2019 by 5 per cent. Prior to this, the dearness allowance was at 12%.

Some features of Dearness allowance:

  • D.A. differs for the employees depending on their work location. Since D.A. is directly connected to the cost of living, it is not the same for all employees and varies for employees working in rural, urban, and semi-urban areas.
  • The Pension Rule 50.A. grants public sector pensioners and family pensioners D.A. in order to compensate for or price rise.
  • DA is reviewed biannually, once in every 6 months, on the basis of the cost of living index. D.A. is merged with the basic salary of an employee when it exceeds the limit of 50%. D.A. turns into that part of the salary which forms a component of retirement benefit salary.
  • Pension revision for the retired employees of the public sector is done whenever a Pay Commission proposes a new salary structure. Similarly, whenever the D.A. is revised by a certain percentage, the pension of the retired employees undergoes revision accordingly.
  • Pensioner’s Dearness Allowance is computed on the basic pension of an employee without commutation. This means, an employee receives a specific percentage of his/her original pension as D.A.
  • The Income Tax Act mandates that tax liability for Dearness allowance will have to be declared in the filed returns.

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