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Dearness Allowance is calculated using the All-India Consumer Price Index (AICPI).

The Centre has approved a 4% increase in Dearness Allowance (DA) and Dearness Relief (DR), bringing the total DA to 50% of the basic salary for central government employees and pensioners. This decision also includes a 25% increase in transport, deputation, and canteen allowances.

The move, announced by Commerce Minister Piyush Goyal in a press conference, is expected to benefit 49.18 lakh central government employees and 67.95 lakh pensioners. Considering both DA and DR and the increase in other allowances, it’s going to cost the exchequer an estimated Rs 15,000 crore for January and February in the fiscal year 2024, reported The Hindu.

As part of the revision, various allowances such as Housing Rent Allowances (HRA), Children’s Education and Transport Allowances, and gratuities will see an increase based on the formula recommended by the 7th Pay Commission. Employees and pensioners will receive arrears for January and February, along with the revised rates for March.

The revision in DA and DR, based on the Consumer Price Index – Industrial Workers (CPI-IW), occurs twice a year. The first revision, effective from January 1, is usually announced just before Holi, with the second revision, effective from July 1, decided before Durga Puja.

Commerce Minister Piyush Goyal did not confirm whether the DA and DR reaching 50% would trigger a merger into the basic salary, but he acknowledged that other allowances would increase with this revision. Similar increases for state government employees are anticipated following this announcement.

For HRA, the country is divided into three categories – X, Y, and Z. The revised rates for X, Y, and Z categories are now 30%, 20%, and 10%, respectively. For instance, with a minimum basic salary of Rs 18,000, the new HRA will be Rs 5,400, Rs 3,600, and Rs 1,800, respectively.

The increase in DA will also impact transport allowances, daily allowances, hostel subsidies for children’s education, and retirement gratuity. The DA reaching 50% will also benefit Chairpersons and Members of select regulatory bodies, increasing their monthly remuneration by 25%. 

How is DA calculated?

DA is calculated using the All-India Consumer Price Index (AICPI), which tells us how the prices of everyday items change over time.

Here’s how it works:

Check the AICPI: Look at how much the prices have gone up or down, based on what people pay for groceries and services. The Labour Ministry provides this number.

Pick a Time Period: Depending on whether you work for the Central government or the Central public sector, choose a specific time, like the average prices over the last 12 months for government employees or the last three months for public sector employees.

Do the Math: Plug the AICPI into a formula to calculate how much extra money you should get. 

DA calculation for central government employees

DA% = ((Average of AICPI (Base Year – 2001=100) for the past 12 months -115.76)/115.76) *100

For central public sector employees

DA% = ((Average of AICPI (Base Year – 2001=100) for the past 3 months -126.33)/126.33) *100

The percentage you get is the extra amount added to your salary to help you keep up with the higher costs of things around you.