City Compensatory Allowance (CCA) is an allowance that is paid to employees, as a part of their CTC (Cost To Company), by business establishments and organizations in public and private sectors. This acts as a compensation for the high cost of living in metropolises and large cities where the standard of living is higher than the national average. This is especially true for employees of Tier I cities and in certain cases for Tier II cities as well.
These cities generally comprise of cities like New Delhi, Mumbai, Kolkata, Bangalore, Chennai, Hyderabad, Pune, etc. The City Compensatory Allowance also differs within Tier I cities based on the standard of living. For instance, CCA for employees in a city like Mumbai will be comparatively higher than that of an employee of another Tier I city, say, New Delhi. CCA to employees in Tier II cities is left at the discretion of the employer.
Besides, the City Compensatory Allowance component in the salary structure is also determined based on the pay scale and grade of the employee and on the basis of his/her basic salary. Hence, City Compensatory Allowance differs between cities. Similarly, employees working in rural areas will receive a lower City Compensatory Allowance than employees working in urban areas. There is no applicable maximum or minimum limit for City Compensatory Allowance. As per Section 10(14) of the Income Tax Act, 1961, City Compensatory Allowance is fully taxable.
The components of an employee’s gross salary can be classified under 5 categories. These are:
Some of the examples of perks and allowances over and above the basic salary of an employee are Dearness Allowance, House Rent Allowance, City Compensatory Allowance, Deputation Allowance, Medical Allowance, Leave Travel Allowance, Officiating Allowance, amongst others.
There are no stringent regulations regarding the computation of the basic salary of an employee and the components of gross salary, as discussed above. City Compensatory Allowance is one of these allowances that are not accompanied by regulations regarding the maximum or minimum capping on eligibility, leaving it on the employer to decide the amount that they would like to offer to the employees.
Decision on the amount of CCA is generally based on the following considerations:
The percentage offered as City Compensatory Allowance to employees across sectors – government organizations as well as public and private sector firms, usually range between 10% and 20%.
Higher management level employees usually do not qualify for City Compensatory Allowance as their pay scale belongs to a range that is substantial to meet the high cost of living, typical to metropolitan and large cities, especially Tier I cities.
Employees belonging to the lower level in an organization’s hierarchy are usually eligible for City Compensatory Allowance as their basic salaries are not sufficient to meet the basic standard of living in Tier I and Tier II cities. In most cases, a certain fixed amount is paid to employees as City Compensatory Allowance and not calculated in terms of a pre-determined percentage on basic salary. If that had been the case, it would imply that an employee with a high basic salary would be eligible for a higher City Compensatory Allowance, which would be a biased decision.
As mentioned before, the calculations for City Compensatory Allowance is based on the discretion of the employer and is based on several factors like the type of area (urban or rural), type of city (Tier I or Tier II), standard of living in Tier I cities, employees’ pay scale and grade, etc.
While it is mandatory for business enterprises and organizations of Tier I cities to include City Compensatory Allowance as a part of the salary structure of their employees, the same cannot be said for employees working in Tier II cities. The City Compensatory Allowance for employees of Tier II cities depends on the discretion of the employers. The CCA component that an employee is eligible for appears in the salary slip issued by his/her employee.
Exemption Limit
As per Section 10(14) of the Income Tax Act, 1961, there are no provisions for tax exemptions. Hence, City Compensatory Allowance is fully taxable. It is added to the annual income of a taxpayer and tax is calculated according to the tax bracket that is applicable for him/her.
Allowance Rates
There is no maximum or minimum limit applicable on City Compensatory Allowance rates. It is determined by employers alone.
City Compensatory Allowance is not authorized or regulated by law, except that it is taxed as per the income tax rules. In contrast, HRA and DA are taxed at a certain percentage on the basic salary of an employee.
HRA: House Rent Allowance refers to the fixed percentage taxed on the basic salary of employees. However, it is not fully taxable. It is not taxable up to a maximum of Rs.1 lakh for employees paying house rent, provided receipts of rent paid to the landlord/landlady are duly submitted to the employer while filing tax returns.
DA: Like the HRA, Dearness Allowance is also calculated in terms of a specific percentage on the basic salary of employees. This serves as a measure for financially protecting employees from the volatility of inflation.
CCA: City Compensatory Allowance is fully taxable from an employee’s annual basic salary, as per the applicable tax bracket and CCA rate determined by the concerned employer. It is usually a fixed amount as opposed to a fixed percentage calculated on the basic salary of employees.
What is City Compensatory Allowance?
City Compensatory Allowance (CCA) is an allowance that is paid to employees, as a part of their CTC (Cost To Company), by business enterprises and organizations of the central government as well as public and private sector firms. This is a form of compensation for the high cost of living in metropolitan and large cities where the standard of living is comparatively higher than the national average. The disparity in the standard of living is higher in Tier I cities and in some Tier II cities too. While it is mandatory for organizations based in Tier I cities to offer CCA to their employees, it is not the same for Tier II cities. Offering CCA to employees working in Tier II cities is left at the discretion of employers.
Besides, the City Compensatory Allowance component in the salary structure is also determined based on the employee’s grade and pay scale as well as his/her basic salary. Hence, City Compensatory Allowance varies between cities and also among urban and rural areas. There is no maximum or minimum capping applicable on City Compensatory Allowance. According to Section 10(14) of the Income Tax Act, 1961, City Compensatory Allowance is fully taxable.
What is the maximum and minimum limit that employees are eligible for against City Compensatory Allowance?
There is no maximum or minimum capping on City Compensatory Allowance and is decided as per the discretion of employers.
Is City Compensatory Allowance taxable?
Yes, City Compensatory Allowance is fully taxable as per Section 10(14) of the Income Tax Act, 1961. The amount that an employee receives as CCA is added to his/her annual income, and then taxed according to the tax bracket that is applicable for him/her.
How is City Compensatory Allowance calculated?
Calculations for City Compensatory Allowance varies on the basis of different factors like the type of city (Tier I or Tier II), type of area (urban or rural), standard of living in the city where the organization is located, employees’ pay scale and grade, etc.
The cost of living index in tier I cities is higher than that of Tier II cities. Not just that, the standard of living varies among Tier I cities as well. For example, Mumbai is well recognized as being a more expensive city than other metropolitan cities like Kolkata, New Delhi, Bangalore, etc. Hence, there is no fixed capping on CCA. It is mandatory for organizations of Tier I cities to include City Compensatory Allowance as a part of their salary structure, it is not so for employers of Tier II cities. The City Compensatory Allowance for employees of Tier II cities depends on the discretion of the employers. The CCA component that an employee is availing is included in the salary slip issued by his/her employee.
Is City Compensatory Allowance calculated as a fixed percentage or a fixed amount?
Generally, a pre-determined amount is paid to employees as City Compensatory Allowance and is not calculated in the form of a certain percentage on basic salary. If the calculation was based on a certain percentage, it would mean that an employee with a high basic salary would be able to avail a higher City Compensatory Allowance than an employee with a lower basic salary. This would be an unfair decision. The City Compensatory Allowance percentage that employees, irrespective of the sector (government organizations, public and private firms), are eligible for usually range between 10% and 20%.
