DA news: What are the types of dearness allowance, how is it calculated and revised? Here are top FAQs answered

Revised twice annually based on data from the All-India Consumer Price Index (AICPI), Dearness Allowance (DA) is a percentage of employees’ basic salary aimed at mitigating cost-of-living impact on households of central government employees. A DA hike gives employees a higher in-hand salary and a buffer against inflation.

New announcements are usually made in March and October, with rollouts in July and January. Notably, this year, the Finance Ministry in April announced DA hike of 2% for all central government employees and pensioners (including railways and defence personnel), effective from 1 January 2026. This increased the component to 60% of basic pay from 58%.

What are the types of Dearness Allowance?

For calculation purposes, DA is separated into two categories: industrial and variable DA.

• Industrial DA: This is reviewed quarterly for central government public sector employees based on the Consumer Price Index (CPI).
• Variable DA: This applies to all central government employees and is revised twice a year, based on the CPI, to offset inflation.

When calculating DA, it comprises the base index (which remains fixed for a given period) and CPI (used to calculate VDA). Even though CPI numbers are released every month, VDA only changes when the Centre revises the basic minimum wages.

How is DA hike calculated? Formula explained

Notably, the 2% DA hike is calculated based on the AICPI’s 12-month average data, using the method prescribed by the 7th Pay Commission. Under this CPC, there have been 10 hikes since 2021, with the highest at 11% in July 2021. The past two hikes were 2% and 3%, respectively, for January and July 2025.

The formula used to calculate DA hikes is as follows, according to Clear Tax:

• For Central Government Employees: DA percentage = [(Average of AICPI (Base Year 2001 = 100) for the last 12 months – 261.42) / 261.42] x 100
• For Public Sector Employees: DA percentage = [(Average of AICPI (Base Year 2001 = 100) for the last three months – 126.33) / 126.33] x 100

Thus, the DA hike announced in April was calculated as follows:

DA% = [(12-month average AICPI-IW − 261.42) / 261.42] × 100

= (145.54 × 2.88 − 261.33) / 261.33 × 100

= (419.155 − 261.33) / 261.33 × 100

= 157.825 / 261.33 × 100

= 60.39% which is rounded down to 60%

Who benefits from the DA hikes?

DA is provided by the central and state governments to its employees and retirees. The private sector in India usually does not offer this benefit.

Overall, more than 1 crore government employees and pensioners benefit from DA hikes, including around 50 lakh central government employees and about 65 lakh retired central government pensioners. Notably, there are 18 levels of employees, and individual hikes will depend on the employee’s or pensioner’s level, as their basic pay differs from level to level.

Is DA part of your salary and CTC, subject to income tax?

DA is part of an employee’s cost-to-company (CTC) and is credited to the monthly salary of central government employees. As per the ministry, payments on account of DA involving fractions of 50 paise or more may be rounded off to the next higher rupee, and fractions of less than 50 paise may be ignored.

DA for salaried employees is subject to income tax in its entirety. Income-Tax Rules mandate that the DA component is stated separately in a taxpayer’s I-T returns (ITR).