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.
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.