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.
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
|City Compensatory Allowance||House Rent Allowance.|
|It is the compensation paid by employers for the living cost of their employees in Tier-1 cities.||It is the compensation paid by employers for a rented accommodation of their employees.|
|This allowance remains the same for those employees who live in the same city. There is non significant correlation between the salary and the CCA of an employee.||House rent allowance is a fixed percentage based on an employee’s basic salary.|
|The Income Tax Act does not allow any city compensatory allowance exemption.||There are exemptions allowed for HRA upon submitting required documents.|
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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
|City Compensatory Allowance||Dearness Allowance|
|CCA is for meeting the living cost of an employee in a metropolitan city.||Dearness allowance is for coping with the adverse effect of inflation.|
|CCA applies to the public sector, private sector and central government employees.||DA is only applicable to public sector and central government employees.|
|CCA is not mandatory for every private organisation.||DA is a vital and substantial part of the salary of central government employees.|
It is prudent to note that there is a similarity between city compensatory allowance and dearness allowance: both are fully taxable.
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
Can anyone claim a CCA from the employer?
CCA is completely dependent on the decision of the employer. It does not have any law or said upper and lower limits. Therefore, employees can not claim a CCA from employers. However, more or less, every company pays CCA to ensure that its employees are leading substantially good lives amidst rising costs of living.
Why is there a difference between CCA for Mumbai and Delhi?
CCA is the compensatory amount that a company offers to its employees to live comfortably in a metropolitan city. Its calculation is mainly dictated by the price index of the city considered. Different cities have different cost of living indexes, on account of varied pricing of similar goods and services. Thus, an employee working in Mumbai does not get the same amount as an employee who works in Delhi.
When does CCA increase or decrease?
When an employee transfers from a rural area to a metropolitan city, the cost of living increases; therefore, that employee gets an increment in city compensatory allowance. However, for the opposite, the city compensatory allowance will decrease, or there may be no CCA.
Is CCA the same for every employee?
Generally, CCA is the same for every employee living in the same city. Therefore, a clerk and an officer will receive the same CCA. However, higher officials are generally not allowed to get CCA as their pay scale matches the cost of living index.
Chandhana is a budding investment professional with growing expertise in the capital markets. She has completed her Bachelors in Business Administration with a specialisation in Finance from Christ (deemed to be) University,Bangalore. She is also a CFA L2 candidate. She is currently working as an Investment Associate at Wint Wealth.