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City Compensatory Allowance (CCA)

City Compensatory Allowance (CCA)

City Compensatory Allowance (CCA)

It is essential for companies to provide the best for its employees in order to retain them against the competitive scenario present now. The apparent and most significant reason for an employee considering a switch is generally for a higher salary. Individuals work towards creating and maintaining a comfortable and certain standard of living in a metropolitan city. However, this does not come easy and often stretches out one’s income to a great extent. Therefore, it is necessary for an employer to ensure that their employees are paid appropriately. This is why various allowances are given to employees in addition to their basic salary. A City Compensatory Allowance (CCA) is an allowance offered to an employee living/ working in a Tier-1 city such as Mumbai or Bangalore.

City Compensatory Allowance or CCA

City Compensatory Allowance (CCA) can be defined as an allowance that is provided by companies, regardless of being public sector or private sector, to its employees as a compensation for the high costs of living in a Tier-1 or metropolitan city. At times, this allowance is offered to employees in Tier-2 cities as well. CCA is often computed depending on the grade and pay scale of an employee instead of their basic salary. Therefore, CCA keeps varying from one city to another. For example, an employee working in Delhi would receive a higher CCA when compared to an individual working in Chennai. CCA has no upper or lower ceiling and is completely taxable if the total value of the allowance exceeds INR 900.


All employees from both the private sector enterprises and the public sector enterprises are offered the City Compensatory Allowance. Although CCA has no fixed eligibility criterion, it is generally offered to lower and mid-level employees to support them in meeting their living expenses in high rising metropolitan cities. The reason to why higher level or top management employees are not offered CCA is because their pay scale has already adjusted by keeping their standards of living in the account.

However, there are certain classes of employees who are qualified to receive CCA as their company is registered under the Companies Act and live in comparatively bigger cities. It should be noted that there is no cap on the amount an employee may receive as CCA and it completely at the discretion of the employer.

Calculation of CCA

The calculation of City Compensatory Allowance (CCA) ultimately depends on the employers of an organisation. They may determine which pay structure they wish to follow and it does not cause any breach in the labour laws. The calculation of CCA begins by computing the cost of living index of a particular city along with their employment policies. CCA is paid to an employee as a fixed amount and not as a percentage of their basic pay in a private organisation where pay scales vary according to the various categories of employees.

For individuals employed with the Public Sector Undertakings or Central Government Departments, this allowance is computed as a percentage of their Cost to the Company (CTC) and may range from 10% to 20%. Usually, CCA for all the employees living in the same city would be the same as well. The position of the employee would not be taken into consideration. This translates into an equal amount of City Compensatory Allowance for every employee, be it a manager or a clerk, in the same city.

Limits of CCA

As mentioned earlier, there are no particular rules and regulations that govern the computation of City Compensation Allowance. It entirely depends on the employer to provide a certain amount as the allowance for their employees. It should be noted that no employer is obligated under any law to offer this allowance to their employees working in a metropolitan city. The employer has the freedom to either offer a consolidated salary without any bifurcations or a salary with precisely defined break-up to the employees. At the moment, there are no maximum or minimum limits of CCA applicable to an employee.

Tax Implications

City Compensatory Allowance is completely taxable without any exemptions under the Income Tax Laws. This allowance would be added to the employee’s income, and the tax would be computed according to the applicable taxation rate for Income Tax computation.

CCA vs House Rent Allowance vs Dearness Allowance

The basic three allowances that are primarily offered by a company to its employees are City Compensatory Allowance, House Rent Allowance and Dearness Allowance. Even though there are a few features that are similar by all three allowances, they differ from each other in various senses. Below is a tabular column indicating the fundamental differences between all these allowances.

Allowance House Rent Allowances (HRA) City Compensatory Allowance (CCA) Dearness Allowance (DA)
Definition An Employee receives House Rent Allowance (HRA) from their Employer for the purpose of living in rented accommodation. City Compensatory Allowance (CCA) is offered to an Employee as a compensation for the high costs of living in a metropolitan or Tier-1 city. Dearness Allowance (DA) is provided to an Employee as a compensation for the rising inflation.
Computation It is computed as a fixed percentage of the Employee’s basic salary. This allowance is generally a fixed amount for all the employees working in the same city. It is computed as a percentage of the Employee’s basic salary.
Taxability An employee may claim up to INR 1 Lakh as a deduction against HRA, provided that they produce receipts of the rent from the landlord when filing tax returns. This allowance is completely taxable and is added to the salary of an employee for tax computation purposes. There are no limits for the amount an employee may receive as an allowance. This allowance is completely taxable and is added to the salary of an employee for tax computation purposes.