Dearness allowance fully taxable, must be reported in ITR

Dearness allowance and dearness relief (DA and DR), a component of basic salary for central government employees and pensioners, are fully subject to income-tax. Taxpayers must report DA separately in their income tax returns as per their applicable income slab rate. The allowance, aimed at mitigating inflation, is adjusted bi-annually with announcements typically in March and October.

Over 1 crore beneficiaries, about 50 lakh central government employees and 65 lakh pensioners, including defence and railway personnel, receive DA. The latest hike was 2% in April this year, taking it from 58% to 60% of basic salary, effective from 1 January 2026. Multiple state governments have since increased DA to close gaps with the central government.

Employees and pensioners expecting a 3-4% hike in July based on AICPI-IW data may still see an increase later this year. Following precedent, a 'Diwali gift' announcement could come in October or November 2026, with Diwali on 8 November. The 8th Central Pay Commission, constituted on 3 November 2025, is expected to announce recommendations by May 2027, with full rollout possibly by 2029-30.