+91As the cost of living in metropolitan cities is comparatively high, maintaining a decent living standard in such cities can severely strain the finances of a salaried employee. Therefore, several organizations provide an additional allowance called City Compensatory Allowance (CCA) to their employees residing in metro cities.
What is City Compensatory Allowance?
City Compensatory Allowance is an allowance offered by the employer organization to its employees residing in tier-1 or tier-2 metropolitan cities in order to help salaried individuals meet the higher cost of living in these cities. The allowance can be provided by both public as well as private sector organizations as a part of employee’s CTC (Cost to Company).
Since CCA is provided at the discretion of the employer, not all companies are bound to offer it. Further, there is no minimum or maximum limit applicable to this allowance. CCA is computed on the basis of pay scale and grade of the employee. CCA is dependent on the cost of living which makes it vary from city to city. For example, the city compensatory allowance may be higher for an employee residing in Mumbai than a person living in Delhi while working for the same organization.
Who is Eligible for City Compensatory Allowance?
Firstly, CCA is dependent on the employment policy of an employer. If the employment policy has the provision to provide city compensatory allowance to its employees, then only it can be part of the employer’s salary structure.
Usually, CCA is provided to lower or middle level employees in the organization in order to help them meet their daily expenses in cities with a high cost of living. It is usually not given to employees working in the upper level of the hierarchy as their pay scale is already high enough to meet the higher cost of living in Tier 1/Tier 2 cities.
It is not necessary that city compensatory allowance will always form a part of your salary or as an employee you are entitled to receive it forever. Your employer can decide to stop giving you CCA due to a change in employment policy or if you are transferred to a rural area/ a city not designated as Tier 1 or Tier 2, where the cost of living is lower.
How is City Compensatory Allowance calculated?
As mentioned before, CCA is provided as per the discretion of the organization and there is no upper or lower cap on it. City compensatory allowance is generally calculated on the basis of multiple factors such as the employment policy of the company, pay scale and grade of the employee, type of city (tier-1 or tier-2), cost of living index of the city etc.
CCA is paid as a fixed amount and not in terms of a percentage of your basic pay. Normally, CCA within an organisation does not vary as per the hierarchy of the employees which means all employees eligible to receive CCA and working in the same city should get the same amount as city compensatory allowance.
What are the tax implications on city compensatory allowance?
As per Section 10(14) of the Income Tax Act,1961, any amount received as CCA will form a part of your taxable income and liable to be taxed as per your slab rate. Under existing rules of the IT Act, no income tax exemptions are provided on city compensatory allowance.