Dearness allowance and dearness relief are part of salary or pension received by the employee or pensioner, respectively. They are taxed at marginal rate of tax under the head ‘income from salary’
The Centre has announced a freeze in the dearness allowance payable to central government employees and dearness relief payable to central government pensioners at current rates till July 2021. The announcement comes in the backdrop of the economic slowdown caused by novel coronavirus-led lockdown.
The office memorandum made it clear that additional amount of money due to government employees and government pensioners on account of revision on dearness allowance (DA) and dearness relief (DR), respectively, will not be paid from January 1. However, the government announced that the DA and DR at current rates will continue to be paid.
The rate of DA and DR are reviewed half yearly. These rates for January 1, July 1 and January 1, 2021 will be restored prospectively from July 1 next year. However, no arrears for the period from January 1, 2020 till June 30, 2021 shall be paid. This move will leave the employees and pensioners inadequately compensated if the inflation jumps up drastically in the period of suspension of rate review.
“Non-payment of additional DA will reduce the savings of employees and pensioners as they have to spend a larger component of their salary or pension to maintain their standard of living as inflation continues to march ahead,” says Balwant Jain, a Mumbai based investment and tax expert.
DA is a component of the central government employees’ compensation package. It is reviewed to factor in the inflationary trends in the economy. As inflation rises, the DA stands revised at regular intervals and it ensures that the salaries of the employees are adjusted in line with inflation. While computing DA, the consumer price index is used to account for inflation. DR does the same for the pensioners. DA was last reviewed on October 25, which was made effective from July 1, 2019.
DA and DR are part of salary or pension received by the employee or pensioner, respectively. They are taxed at marginal rate of tax under the head ‘income from salary’.
“Salary becomes taxable on earlier of the two: amount due or receipt. Here it would become taxable on due basis whether received or not. But since the notification provides that the instalments of these period shall not be paid, the question of same becoming due does not arise as these become due on announcement of rates of DA,” says Jain. Moreover the DA rates in this period will be announced prospectively and the government does not intend to pay it even later, he added.
So the question of tax liability on the additional DA payment does not arise.
Abhishek Soni, CEO and Co- Founder, Tax2win.in – an income tax return filing portal, said, “Since the DA and DR are not getting revised, the salary or pension will not go up. Also, there will not be payment of DA and DR arrears in future. Hence, the recipient continues to get taxed at the slab rate after factoring in deduction availed, if any. There is no additional tax liability for the recipient.”
In case of payment of arrears, the recipient need to claim relief under section 89(1) of the Income Tax Act by filling up form 10E. “The relief is restricted to the excess tax payable in the year of receipt over the income tax payable in the year in which the income was accrued,” Soni explained. For example, if the excess income tax you would have paid in the year of receipt is more than the excess tax paid in the year of accrual of income, then the difference between the two is the relief you can claim.The government’s tax revenues have fallen due to lockdown and at the same time the government has to spend money to support the population in these difficult times by providing them with basic necessities as job losses mount. That has made the government to cut cost. The step taken on the DA and DR front is aimed at cost rationalisation. The government has also cut salaries payable to members of parliament, president, prime minister and other ministers earlier.