City Compensatory Allowance: Eligibility, Calculation, Offering Limits & Taxability

Companies these days want to keep their efficient employees in the highly demanding and competitive business sector. A great way to ensure employee retention is to add allowances to their basic salary. City Compensatory Allowance is one such allowance that helps employers offer their employees excellent job satisfaction.

What Is City Compensatory Allowance?

Employers of both private and public sector enterprises provide their employees with a City Compensatory Allowance. The amount of money from this allowance helps the employee maintain a standard of living at a higher living cost.

Employers usually compensate by providing this allowance for the high cost of living in a metropolitan city or Tier-I. But sometimes, CCA is also available to the employees working in Tier-II cities.

Who Is Eligible to Claim City Compensatory Allowance?

There are no such eligibility criteria for claiming CCA. However, companies usually offer it only to employees working at lower and middle levels. This is because the pay-scale of higher-level employees and top management is already developed considering their high standard of living.

How Is City Compensatory Allowance Calculated?

compensatory allowance calculation — (source: formassembly)

Employers determine the rates of City Compensatory Allowance at their discretion. They may decide the pay structure whether to be a consolidated salary or basic with allowances.

Employers take into account the cost of living index of a specific city and the company's employment policies to compute CAA. It does not vary with the positions of employees. This means that both a clerk and his reporting manager are subject to equal CAA in the same city.

The CCA rate in a private organisation is not a percentage of employees' basic pay. Since the pay scale varies in different levels of work, private companies keep the CAA rate fixed. However, the rate ranges within 10 to 20% of the cost to the company in Central Government Departments or Public Sector Undertakings.

What Is the Maximum and Minimum Limit to Offer CCA?

As stated before, the amount of City Compensatory Allowance is entirely at the preference of a company. There are no such rules and regulations to administer this allowance.

Also, no company or employer is under compulsion to offer this allowance to their employee under any law. Employers are free to provide a combined salary without providing a salary break-up. Although, they must keep in mind that this does not breach any labour laws.

Is City Compensatory Allowance Taxable?

CCA is entirely taxable without any exemptions under the income tax law. There is no separate slab for City Compensatory Allowance in income tax. First, the amount of CCA is added to an employee’s basic salary along with other allowances. Then the tax is deducted upon the gross income according to the tax slab it falls under.

Differences Between CCA, House Rent Allowance and Dearness Allowance

City Compensatory Allowance	House Rent Allowance	Dearness Allowance
Employers offer CAA to their employees to recoup the high living cost in a metropolitan or Tier-I city.	Employee provides HRA to compensate for the accommodation costs in a rented residency.	Employees get DA from their employers as compensation for the increasing inflation rate.
Usually, there is no limit to the amount of CCA. This is a fixed amount in private organisations. 10-20% CTC in Central Government Departments or Public Sector Undertakings.	Employers calculate it as a fixed percentage of an employee’s basic pay.	Employers compute it as a percentage of an employee’s basic salary.
CCA is entirely taxable. Employers add it to the basic salary, and they charge tax on the gross salary as per the IT slab.	Employees can claim an exemption up to ₹ 1 Lakh on HRA. They can do so by providing receipts from their landlord while filing IT returns.	DA allowance is fully taxable. Employers add it to the basic salary and deduct tax according to the IT slab.

A company keeps the CAA amount the same if an employee moves to a metropolitan city from a remote city. But the employer can reduce the CAA if an employee shifts from a rural town to a metropolis. Meanwhile, the City Compensatory Allowance is a privilege as long as an employer decides to provide or continue to provide. By no means it is an arbitrary choice or demand of any employee.

Frequently Asked Questions

✓ How is City Compensatory Allowance calculated in my salary?

The calculation of the City Compensatory Allowance rate varies from employer to employer. The best way to understand the calculation of CCA upon your salary is to check the components in your payslip.

✓ What is the exemption limit of City Compensatory Allowance in income tax?

According to IT law, City Compensatory Allowance In India is entirely taxable without any exemption. The amount is added to the basic salary, and tax is deducted from the gross salary.