Salary, Allowances, Dearness Allowance, Government Salary and Pay Commission: In this article, we discuss the various parts of salary, what are the various kinds of allowances, how is the salary calculated, what does dearness allowances simply, what is the salary of a government employee and what is the 7th pay commission?
Salary Structure in India
Organisations pay salaries to their employees in exchange for the services rendered by them. The salary paid to employees comprises several different components, such as the basic salary, allowance, perquisites of one’s salary, etc.
The salary structure of an employee is the details of the salary being offered according to the breakup of the various components which constitute the compensation.
Any changes made to the salary structure, i.e., among the elements, can significantly impact what the employee does, like the kind of tax exemptions claimed. Knowing what makes up the salary earned is essential since it helps to keep the employee informed about how much goes into the forced savings and what kind of tax exemptions need to be claimed.
Components of Salary Structure
A few of the components of salary structure include:
Basic Salary
The base income of an employee is their basic salary, comprising 35-50 % of the total salary. It is a fixed amount paid before any reductions or increases due to bonus, overtime or allowances.
Basic salary is decided on the basis of the employee’s resignation and the industry in which they are working. Most of the other components, such as allowances, are on the basis of the basic salary. This amount is entirely taxable.
Allowances
This is an amount payable to employees during their regular job duty. It might be fully or partially taxable, depending on the type it is. According to the company’s policies, the allowances provided and the limits on it will vary from company to company.
- Dearness Allowance – It is a particular percentage of one’s basic salary paid to them, with the aim of mitigating inflation. The government pays it to the employees of the public sector and pensioners at the same.
- House Rent Allowance – The house rent allowance is that component of the salary paid to the employees for meeting the cost of renting a house. It offers tax benefits to employees for the sum that they are going to pay towards their accommodation each year. Salaried people residing in rented homes can also claim this exemption and reduce the tax liability.
- Conveyance Allowance – The conveyance allowance, also referred to as the transport allowance, is the kind of allowance offered by employers to the employees for the compensation for their travel expense to and from their residence and the workplace. Please Note – In the Union Budget of 2018, a standard deduction of Rs. 40,000 has been introduced instead of allowances such as transport (Rs 19,200) and medical (Rs 15,000).
- Leave Travel Allowance – The Leave travel allowance is allowed for tax exemption. Employers offer it to their employees to cover the latter’s travel expense when they are on leave from work. The amount that is paid as leave travel allowance is exempt from tax under Section 10(5) of the Income Tax Act, 1961. The leave travel allowance only covers the domestic travels, and the mode of travel has to be either air, railway or public transport.
- Medical Allowance – Medical allowances are a fixed allowance paid to the employees of an organization for meeting their medical expenditure. Please Note – In the Union Budget of 2018, a standard deduction of Rs. 40,000 has been introduced instead of allowances such as transport (Rs 19,200) and medical (Rs 15,000).
- Books and Periodicals Allowance – The books and periodical allowance is the type of allowance which is given to employees for helping them in meeting the expenses associated with the purchase of periodicals, books and newspapers. It is tax-exempt for the extent of the actual expenditure incurred to the purchase of periodicals and books.
Gratuity
Gratuity can be defined as the lump sum benefit paid by employers to the employees who are retiring from the organization. This is only payable for those who have completed 5 or more years in the company. This gratuity amount is paid ingratitude of the services that the individual has rendered during the period of their employment.
According to the Act of 1972, Payment of Gratuity is calculated as 4.81% of an employee’s basic pay. Most companies with a workforce of 10 or more employees come under this Act.
Employee Provident Fund
The Employee Provident Fund is a benefits scheme for the employee where the investments are made by the employer and the employee both every month. It is a savings platform aiding employees to save a portion of their salary each month, from which withdrawals could be made following a month from the date of termination of service or on retirement.
At least 12% of the employee’s basic salary is automatically going to be deducted and goes to the Employee Provident Fund each month. Employees Provident Fund Organization (EPFO) maintains the contributions.
Professional Tax
The professional tax is a tax being imposed on the income that is earned by the salaried professionals, including the doctors, chartered accountants, and lawyers, etc., by the state government. Different states have various methods of calculating professional tax.
The maximum amount that needs to be paid in a year is Rs. 2,500. Employers deduct professional tax at prescribed rates from the salary paid to employees and spend it on their behalf of the State Government. The collected revenue is used for the Employment Guarantee Scheme and the Employment Guarantee Fund.
Perquisites
Perquisites, also known as the fringe benefits, benefit some employees because to their official position. These are usually non-cash benefits given in addition to the cash salary. Some perquisites include providing a car for personal use or rent-free accommodation, payments of premium on any personal accident policy, etc. The monetary value of the perquisites gets added to the salary, and the employee pays tax on them.
ESIC
If a firm has 10 or more employees (20 in Maharashtra and Chandigarh), who have a gross salary below the amount of Rs. 21,000 each month, then the employer is needed to avail the ESIC scheme for employees like this. The employer’s contribution is going to be 4.75% of their gross salary, whereas the employee’s contribution is going to be 1.75% of the gross wage.
What is Dearness Allowance?
The government of India pays Dearness Allowance to the employees and a pensioner to offset the impact of inflation. The adequate salary of government employees requires constant enhancement for helping them manage the increasing prices.
Despite all the actions that the Indian government has undertaken for controlling the inflation rate, only partial success could be achieved as the prices move in accordance with the market. Therefore, it becomes crucial for the government to shield its employees from the disadvantageous effects of inflation.
As the inflation impact varies according to the employee’s location, the dearness allowance is going to be calculated accordingly. Thus, DA differs from employee to employee depending on its presence in the – urban, semi-urban or rural sectors.
How is Dearness Allowance Calculated?
As DA is offered to employees for protecting against the price rise in a specific financial year, it is calculated every year twice – in the months of January and July. The formula for calculating the dearness allowance was changed in the year 2006 by the Government.
Presently, DA is calculated according to the following procedure: For the Central Government employees (CGE) % of Dearness Allowances = {(Average of All India Consumer Price Index (Base year of -2001 =100) for the previous 12 months -115.76)/115.76} x 100
For employees of the Central Public Sector (CPS) % of DA = {(Average of the All-India Consumer Price Index (Base year of -2001 =100) for the previous three months -126.33)/126.33} x 100
Treatment of the Dearness Allowance under the Income Tax
According to the latest updates, DA is fully taxable for the salaried employees. Suppose the employee has been provided with an unfurnished rent-free accommodation.
In that case, it becomes part of the salary up to which forms the retirement benefit salary for the employee, provided that all the other pre-conditions are being met. India’s income tax rules need the DA component to be introduced separately in the returns which have been filed.
Types of Dearness Allowance
For calculating, DA is divided into two different parts: Industrial Dearness Allowance (IDA) and Variable Dearness Allowance (VDA).
The Industrial Dearness Allowance (IDA) applies to the Public sector employees of the Central Government. Depending on the Consumer Price Index, the Industrial Dearness Allowance for the public sector employees undergoes quarterly revisions to offset the impact of rising inflation levels.
Variable Dearness Allowance (VDA) applies to the Central Government employees. As per the Consumer Price Index, it is revised every six months for assisting offset the impact of the rising inflation levels. The VDA in itself depends on the three different components, as stated below.
- Base Index – it remains fixed for a specific period.
- Consumer Price Index – it impacts the VDA as it changes each month.
Variable DA amount which the Government has set remains fixed unless the government has revised the basic minimum salaries.
Dearness Allowance for Pensioners
Pensioners, in this case, are retired employees of the central government who are eligible for either the family or individual pension from the government. Each time the Pay Commission rolls out a new salary structure, changes are also reflected on the pension of the retired employees.
Similarly, if a particular percentage alters the Dearness Allowance, the pension of the retired individual is revised accordingly.
Changes in the Dearness Allowance according to the Budget of 2018
According to an estimate, more than 50-lakh central government employees received the government’s salary. Then there are also other 55-lakh retired central government employees eligible for a pension.
In accordance with the Central Government’s recent announcement in the Budget of 2018, the Dearness Allowance has been hiked by 2%. This was a significant relief for all those beneficiaries since their Dearness Allowance has been enhanced from 5% to 7%. These changes are going to benefit all the employees and pensioners of the Central Government of India significantly.
Difference between the DA and HRA
Dearness Allowance should not be confused with the HRA as they are two different components and are treated separately for income tax. One major difference is that HRA applies to private as well as public sector employees, even though only public sector employees are entitled to DA. There are certain tax exemptions applicable for the HRA that is not available for the DA.
Central Pay Commissions (CPC)
The government constitutes of the Central Pay Commission(CPC) almost every 10 years for revising the salary of its employees. Often these are adopted by the states on some modifications. In the government sector, unlike in the private sector, the pay hike is a once-in-10-years-affair, which makes CPC, right from the first that submitted its report in the year 1947, a hugely influential agency.
Yes, the Government employees need to undergo an annual appraisal process known as the Annual Performance Appraisal Report (APAR). However, that exercise is only for the promotion and not for any hike in pay.
Government employees are not entitled to a regular hike in dearness allowance, which is meant to offset inflationary pressure on the earnings. Still, it is the CPC who fixes the bureaucrats’ pay for the 10 long years.
| Central Pay Commission | Date of Appointment | Date of Submission of Report | Highlights |
| First Pay Commission | May of 1946 | May of 1947 | |
| Second Pay Commission | August of 1957 | August of 1959 | |
| Third Pay Commission | April of 1970 | March of 1973 | Payment of the DA whenever the CPI rose by 8 points over-index of 200 (with the base 1960 = 100). The extent of neutralisation is granted with effect from 1st January 1973 ranged from 100% to 35% |
| Fourth Pay Commission | June of 1983 | Three Reports submitted in June of 1986;
Respectively December of 1986 and May of 1987 |
Implemented from 1st January 1986 with effect. The DA grant on a ‘percentage system’ on the basic pay (1986). Also, it recommended the payment of DA twice a year; 1st January and 1st July. Each instalment of the DA used to be calculated with reference to the percentage increase according the 12 monthly average of the All India Consumer Price Index (base 1960). The neutralisation extent now ranged between 100% to 65%. |
| Fifth Pay Commission | April of 1994 | January of 1997 | Implemented with effect from January 1st, 1996. It looked into the differential neutralisations and found it out to be an injustice for the senior officers and the recommended uniform neutralisation of 100% for the employees at all the levels. The Commissions have suggested that the dearness allowance has to be converted into the dearness pay with an increase in the living cost rises by 50% every time over the base level. |
| Sixth Pay Commission | October of 2006 | March of 2008 | Implemented with effect from January 1st, 2006. |
| Seventh Pay Commission | February of 2014 | Before December of 2015 | Scheduled to take effect from January 1st, 2016. |
7th Pay Commission
The basic salary of the employees is going to be multiplied by the fitment factor – 2.57. It is going to increase the monthly CTC of the government employees except for the allowance. Another part of the salary breakup will be the allowances that include Dearness Allowance (DA), House Rent Allowance (TA), medical reimbursement, Travel Allowance (TA), etc.
Ever since0 the Indian government has announced that it will reinstate the Dearness Allowance restoration for almost 52 lakh central government employees. The servants of the central government are confused about how it is going to affect the salary.
It has already been announced by the government that these benefits are going to be given to the employees from July 1st, 2021. The central government employee’s (CGE) DA will be increased from 17% to 28%, which includes a 3%, 4%, and expected 4% DA hike due since the 1st January 2021.
As per the seventh pay commission rules, the employees’ basic salary is going to be multiplied by the fitment factor, 2.57. This will increase the monthly CTC of the government employees except for the allowance.
The Travel Allowance (TA) will further increase after the DA with the pending balance added to the salary.
The DA hike will also change the monthly PF, Gratuity contribution from the central government employees.