The rising cost of living is a major concern for most. Employees provide regular salary hikes to their employees to keep up with the inflation. The central government pays Dearness Allowance to its employees to compensate for the change in their cost of living. A part of the basic salary is an additional income for employees and pensioners in a city or state. However, the DA rate depends on the location of the service and the latest salary structure prepared by the Pay Commission.
Since the Income Tax Department treats DA as taxable income, the PAN card is mandatory for all income-tax-related transactions. Let’s consider PAN cards a key requirement for DA documentation.
What is Dearness Allowance?
Dearness Allowance, or DA, is the government’s allowance to current and retired public sector employees to compensate for the cost-of-living adjustment. It depends on the government employee’s basic salary percentage and service location. The DA differs for rural, urban, and semi-urban employees. For many, a portion of this allowance may be wisely saved in a savings account to ensure financial stability and growth.
Increased DA Effective From 1st January 2024
Recently, central government employees witnessed a 4% increase in their Dearness Allowance, reaching 50% from 46%. Similarly, central government pensioners received a 4% hike in their Dearness Relief from 46% to 50%. For instance, if an individual’s basic salary is Rs. 48,000 pm, they receive Rs. 22,080 DA at the 46% rate. However, with the new DA rate of 50%, they will now receive Rs. 24,000, amounting to an additional salary of Rs. 1,920.
According to the 7th Pay Commission, other allowances and salary components will also increase with an increase in the DA, including HRA, gratuity ceiling, daily allowance, TA on transfer, mileage transport, hostel subsidy, Special allowance for childcare, Children’s education allowance, etc.
Tax Implications on Dearness Allowance
The Income Tax Act treats DA as taxable income. Since it is a part of the individual’s total income, it follows the same taxation rules as other salary components. DA received from the employee’s salary forms a gross income, and the credit salary includes the DA. Hence, it is taxable according to the relevant income tax slab.
Usually, employers deduct DA from the employees’ salaries through TDS and deposit it with the government. Hence, the employee must declare the DA and other details when filing Form 16 for the Income Tax Return. The Income Tax Department uses these details to calculate an individual’s tax liabilities and determine the payable tax amount.
What is a PAN?
PAN stands for Permanent Account Number, a 10-digit alphanumeric number the Income Tax Department issues to each Indian taxpayer. The goal is to record an individual’s tax-related information and transactions against the PAN number and link their taxation activities with the department. The PAN serves as a database for different transactions, including TDS and TCS credits, returns on wealth, gifts or investments, income tax payments, etc. The Income Tax Department uses the PAN to identify taxpayers’ tax-related activities.
Is PAN Mandatory?
According to the new guidelines of the Income Tax Department, a PAN card is mandatory for claiming income tax returns on all tax-related activities. It helps track the transactions and monitor an individual’s cash inflow and outflow. Moreover, linking PAN with Aadhaar is also mandatory for easier monitoring.
Documents Required for Dearness Allowance When Filing Returns
Return filing in India needs several documents, including proof of income and investments during a financial year. Missing a document might increase tax obligations and lead to unnecessary complications and penalties. Therefore, collating them before starting the filing process is mandatory. Here are a few documents required for DA when filing returns:
- PAN and Aadhaar are linked with each other
- Form-16 declaring the salary earned
- Salary slips with taxable details like DA, HRA, LTA, personal allowance, medical allowance, etc.
- TDS certificates for income from other sources
- Form 26AS, a consolidated statement of annual tax payments
- Investment proofs for tax exemption claims
- Home loan statement for the relevant claims
Filing your ITR with all the relevant documents is important to avoid penalties. So, keeping the Permanent Account Number ready is essential to file the returns without complications, as it is mandatory for Dearness Allowance and other permissible benefits.
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