City Compensatory Allowance (CCA): Meaning, Calculation, Exemption and Taxability

Allowances offer dual sided benefits. One on hand they help meet an array of employees’ specific requirements and on the other they help the employer retain good talent. One primary reason an employee leaves a company is the inadequacy of salary to meet basic requirements in the context of a metropolitan city with rising cost of living. This is where City Compensatory Allowance or CCA comes in.

What Is City Compensatory Allowance?

As the name suggests, City Compensatory Allowance (CCA) is given to employees to meet the high cost of living in a Tier-1 city or a metropolitan city.

It is prudent to note that CCA in special cases is also applicable to Tier-2 cities.

CCA contributes significantly to the net cost to the company (per person). It varies from location to location, i.e it is location specific as it is based on empowering the employee to meet the cost of living at a given location.

What Is the Eligibility for CCA?

City Compensatory Allowance is applicable for both public and private sector employees. There is no hard and fast eligibility criteria for CCA. Generally, it is for low to mid-level employees as they may face financial issues in their lives while having to make ends meet in an environment of growing cost of living. Higher officials likely do not get any city compensation as their salaries are decided in a manner that ensures their comfortable residence in a given location. This generalisation may however vary as each company has different policies for city compensatory allowance.

City Compensatory Allowance Calculation

Employers can choose to pay the CCA separately or can club it with the salary extended to the employee. There are primarily two factors considered for the calculation of CCA, these are:

• Cost of living index of the city where an employee is staying
• Organisation policies

The above two factors are duly considered to estimate and extend a fixed amount as CCA. However, city compensatory allowance for central government employees ranges from 10-20% of CTC. For public-sector employees, the same is applied.

Private organisations tend to have individual, organisational structures for paying CCA to their employees.

Taxability of City Compensatory Allowance

There is no exemption as such available CCA and it is therefore taxed entirely. CCA should be added to the employee’s total income and calculated as per the income tax rate under India’s Income Tax Act.

What Are the Maximum and Minimum Rates of City Compensatory Allowance?

As CCA depends on the living index of the city of choice, it varies, and there is no upper or lower limit as such of CCA. Further, there is no hard and fast law mandating the payment of a said amount of CCA.

Thus, it’s ultimately at the discretion of the employer to pay or not pay a said amount of CCA. They can either pay it separately or adjust the total salary.

Also Read: Dearness Allowance (DA) – Meaning, Types, DA Calculation & Taxability

What Are the Differences Between CCA, HRA and DA?

Employees can get different types of allowance as benefits on their basic salary. Even though the allowances may seem similar, they have specific differences. For example, the purpose of city compensatory allowance may be confused with HRA’s purpose. Here is a compilation of the stark differences between CCA and HRA:

Differences between CCA and HRA

Also Read: What Are Electronic Gold Receipts?

Apart from this, the purpose of CCA and DA are often also confused. The differences between these two are as follows:

Difference between CCA and DA

It is prudent to note that there is a similarity between city compensatory allowance and dearness allowance: both are fully taxable.

Also Read: HRA or House Rent Allowance: Deduction & Calculation

Final Words

CCA, a taxable allowance is a beneficial step from an employer’s end to help the employees sustain themselves in a metropolitan city. As aforementioned, the allowance has dual sided benefits. It helps the employer retain good talent and reduce attrition (if any) on account of increasing cost of living.

Frequently Asked Questions