Since the cost of living in metropolitan cities and some of the larger cities is extremely high, several companies provide additional allowance as compensation known as City Compensatory Allowance. This amount is completely taxable under the IT Act.
City Compensatory Allowance is an allowance provided by an employer (companies- both public and private or any other organisation) to their employees as part of their salary to meet the higher cost of living. It is generally provided to employees of metropolitan cities, tier-1 and tier-2 cities to compensate for their higher living standards. They are fixed monthly payments and are different across different cities, employee designations and organisations. However, for employees of central government or public sector undertaking etc., CCA generally ranges from 10 to 20% of the Cost to Company (CTC). It remains fixed irrespective of the pay scales or employee designations.
They vary from place to place and from company to company mainly because CCA is determined either in accordance with the cost of living index or the company’s employment policies.
No law governs the payment of CCA. Therefore, the above are general practices laid down and are not indicative of any specific rules or regulations. It is pertinent to note that the employer pays these allowances at his discretion and is not compelled by any Act, rules or regulations to do so. Therefore, one cannot enforce the payment of such allowances from their employer and that the employer is free to provide CCA at such terms as he may decide.
What is City Compensatory Allowance (CCA)?
City Compensatory Allowance (CCA) is a type of allowance offered by companies to their employees to compensate for the high cost of living in metropolises and large cities. This is typically offered to employees staying in Tier 1 cities and in some cases Tier 2 cities at the discretion of the employer. CCA is fully taxable under Indian income tax laws.
City Compensatory Allowance or CCA is an allowance provided by companies, (public sector or private sector), to its employees to compensate for the higher cost of living in metropolitan or Tier-1 cities. In some cases, CCA is also offered for employees working in Tier-2 cities as well.
City Compensatory Allowance is offered at the discretion of the employer. CCA is computed as per the pay scale and grade of an employee and not as per the basic salary. Thus it differs between cities. For instance, an employee working in Mumbai would receive a higher CCA as compared to someone working in Delhi. There is no upper or lower ceiling for CCA, and for all taxation purposes, CCA is fully taxable if the amount exceeds Rs. 900/
Who is Eligible for CCA?
City Compensatory Allowance is provided to employees of both public sector enterprises as well as private sector enterprises. There is no fixed eligibility criterion for CCA, but it is usually offered to middle or lower-level employees to help them meet their living expenses in metropolitan cities. Top management or higher-level employees do not receive CCA, as their pay scale has already been developed while keeping into account their standards of living.
Specific classes of employees working with an organization registered under the Companies Act and living in specific large cities qualify to receive a CCA from their employer. There is no cap on the amount of CCA that can be provided to an employee, and it is entirely at the employer’s discretion.
How is CCA Calculated?
Employers have the discretion to determine the pay structure they follow. For example, they can pay consolidated salaries or divide the salary into basic plus allowances. They would not be breaching any labour laws by doing so.
Employers’ primary criterion for computing CCA is the cost of living index in a particular city and its respective employment policies. In a private organization where different categories of employees have different pay scales, the City Compensatory Allowance is paid as a fixed amount and not as a percentage of the basic pay.
For employees working with central government departments or Public Sector Undertakings, CCA is computed as a percentage of the CTC (Cost to the company) and can vary between 10% and 20%.
Generally, the CCA for all employees living in a particular city will be the same, i.e., it will not vary according to the employee’s position. This means that under normal circumstances, an employee working as a clerk and one working as a manager in a company in Delhi will receive the same amount as the City Compensatory Allowance.
Taxability of CCA and other fully taxable allowances
The Act does not provide for any exemptions for CCA and is therefore fully taxable in the hands of the employee.
Few other allowances which are fully taxable under the Act are indicated below:
- Entertainment Allowance
- Dearness Allowance
- Overtime Allowance
- Fixed Medical Allowance
- Servant Allowance
- Project Allowance
- Tiffin/lunch/dinner Allowance
- Transport Allowance other than to blind/deaf & dumb/ orthopedically handicapped employees
For tax nerds: As per Section 2(24)(iiib) of the Act, the term ‘income’ includes any allowance granted to the assessee either to meet his personal expenses at the place where the duties of his office or employment of profit are ordinarily performed by him or at a place where he ordinarily resides or to compensate him for the increased cost of living.
Such allowances are income in the hands of the employee and fully taxable unless specifically exempted under the Act as per CBDT Circular No. 701 dated 23 March 1995. The judiciary has upheld this position in various cases.
Such income is also not enlisted as fringe benefits provided by the employer under section 115WB, which requires the employer to remit taxes on such expenditure. Therefore, from the above provisions, we can conclude that CCA shall be taxable in the hands of the employee as ‘Salary’ income.
Maximum and Minimum Limit of City Compensatory Allowance
As specified above, no specific rules and regulations govern the calculation of the City Compensatory Allowance (CCA). It is entirely at the discretion of the employer to offer a particular amount as CCA. If an employer does not pay CCA separately to his employees working in a metropolitan area, he is not obligated under any law to do so.
The employer is free to offer a consolidated salary to the employees without any bifurcations or a salary with a clearly defined break-up. As such, there are no applicable maximum or minimum limits of CCA that can be offered to an employee.
Difference between City Compensatory Allowance (CCA), House Rent Allowance (HRA) and Dearness Allowance (DA)
| Particulars | House Rent Allowance (HRA) | Dearness Allowance (DA) | City Compensatory Allowance (CCA) |
|---|---|---|---|
| Purpose | HRA is provided to an employee to meet his rental expenses | DA is provided to compensate for the inflation/ rising prices | CCA is provided to compensate for higher costs of living in bigger cities |
| Taxability under the Act | Partially exempt under section 10(13A) of the Act subject to certain conditions. | Fully-taxable | Fully-taxable |
FAQs
How to calculate City Compensatory Allowance in my salary?
The rate at which City Compensatory Allowance (CCA) is calculated can differ among employers. To grasp how CCA is computed based on your salary, the most effective approach is to review the details in your payslip.
What is the exemption limit of City Compensatory Allowance in income tax?
As per the IT law in India, City Compensatory Allowance (CCA) is fully taxable without any exemption. It is considered part of the basic salary; taxes are deducted from the gross salary, including the CCA amount.
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