It is imperative for companies to retain its employees in the present-day competitive scenario. One of the biggest reasons behind an employee switching jobs is higher salary. Maintaining a certain living standard in a metropolitan city is not easy and stresses an individual’s salary to a great extent. It, therefore, becomes essential for an employer to ensure that the employee is remunerated suitably. This is the reason behind different types of allowances being paid to an employee in addition to the basic salary. One of the allowances that are offered to an employee working/living in a Tier-1 city like Delhi, Mumbai, Bangalore, Hyderabad etc. is City Compensatory Allowance or CCA.
What is City Compensatory Allowance?
In simple words, 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 as per 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 higher a CCA as compared to someone working in Delhi. There is no upper or lower ceiling for CCA and for all taxation purpose, CCA is fully taxable if the amount exceeds Rs. 900/-
Who are 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 discretion of the employer.
How is CCA calculated?
It is entirely at the discretion of employers to determine the pay structure it follows, i.e. they can pay consolidated salaries also or can divide the salary into basic plus allowances. They would not be breaching any labour laws by doing so.
The primary criterion taken into account while computing CCA by employers is the cost of living index in a particular city and their respective employment policies. In a private organization where different categories of employees have different pay scales, City Compensatory Allowance is paid as a fixed amount and not as a percentage of the basic pay.
In the case of employees working with the 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% to 20%.
Generally, CCA for all employees living in a particular city will be the same, i.e. it will not vary according to the position of the employee. This means under normal circumstances, an employee working as a clerk and one working as a manager in a company in Delhi will be receiving the same amount as City Compensatory Allowance.
Maximum and Minimum limit of City Compensatory Allowance
As specified above, no specific rules and regulation govern the calculation of City Compensatory Allowance. It is entirely at the discretion of the employer to offer a particular amount as CCA. If an employer is not paying 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 either offer a consolidated salary to the employees without any bifurcations or offer salary with the clearly defined break-up. As such, there are no applicable maximum or minimum limits of CCA that can be offered to an employee.
Tax Implications of City Compensatory Allowance
Under the Income Tax Laws, City Compensatory Allowance or CCA is fully taxable, without any exemptions. For income tax computation, CCA will be added to the income of the employee and tax would be calculated as per the applicable taxation rate.
Difference between City Compensatory Allowance, House Rent Allowance and Dearness Allowance
City Compensatory Allowance, House Rent Allowance and Dearness Allowance are three essential allowances that are provided by a company to its employees. Though, some of their features are similar, these three are very different in many senses. Here are the fundamental differences between these three allowances: –
- House Rent Allowance: – An employer offers house Rent Allowance or HRA to an employee living in a rented accommodation. It is calculated as a fixed percentage of the basic pay. Employees can claim up to Rs. 1,00,000/- deduction against HRA, provided they can produce rent receipts from the landlord while filing tax returns.
- Dearness Allowance or DA: – Dearness Allowance is offered by employers to compensate the employees against rising inflation. It is calculated as a percentage of the basic salary. DA is fully taxable and is added to the income of the employee for tax calculation purpose.
- City Compensatory Allowance or CCA: – City Compensatory allowance is provided to an employee to compensate the employees against the higher cost of living in a metropolitan or large city. City compensatory allowance is not related to basic pay and is calculated as per the discretion of the employer. It is usually a fixed amount for all employees working in a particular city. For taxation purpose, CCA is fully taxable and is added to the income of the employee for tax calculation purpose. There is no maximum or minimum limit of CCA that an employee can receive.
If an employee is transferred from a rural city to a metropolitan area, he/she will receive the same CCA as all other employees are receiving. In case an employee is transferred from a metropolitan area to a rural area, the employer can discontinue the payment of CCA, as the cost of living in a rural area is significantly lower as compared to a metropolitan area. In a nutshell, City Compensatory Allowance is a privilege extended by an employer to compensate the employees against the higher cost of living in a particular city but in no way can it be demanded by an employee as arbitrary.