Lifestyle Support Allowance: City Compensatory Allowance

Every work that an employee does is credited with a salary. In certain cases, the salary isn’t enough to compensate for the regular expenses of an individual. So, to fulfill the requirements, various allowances, and perquisites are offered to the employee.

There are different types of allowances offered to employees of the company depending on the need that they are compensating. One such allowance is the City Compensatory Allowance (CCA).

This article will explain in general the various allowances and City Compensatory Allowances in detail.

Table of contents:

1. Allowance: Definition
2. Types of Allowance
3. What is City Compensatory Allowance? 
4. Eligibility
5. Calculation of CCA
6. Taxation of CCA
7. Conclusion

Allowance: Definition

Allowance is additional benefits offered to the employee by the company or organization. These benefits are provided to meet specific requirements like rent, medical expenses, etc.

Allowances are credited along with the salary. Not all allowances mean the same because every company offers different allowances for a specified requirement for their employee. This can also be defined as the reimbursements paid back to the expenses of an employee.

Apart from this, allowances are claimed frequently because most of the allowances that are offered can be exempted from taxes. To avail of this benefit, usually employees claim their allowances every month.

Not to confuse allowance with bonuses. The difference between a bonus and an allowance is that bonuses are given during special occasions or festive seasons, while allowances are given to cover the regular expenses of an individual.

Types of Allowances

As mentioned before, there are different types of allowances based on the requirement of the employee. Here are a few allowances that are offered to the employee:

1. Dearness Allowance:** This is credited along with the salary to manage inflation occurring in the economy. When the cost of living is increased, the employee can claim this allowance.
2. Entertainment Allowance: Just as the name sounds, this is given to meet the entertainment expectations of the employee. You can’t avail of an exemption because this allowance is entirely taxable along with the salary. 
3. Medical Allowance: In Case of medical expenditures, medical allowances can be claimed. 
4. Overtime Allowance: Extra hours worked, then you get an overtime allowance. Every time an employee works after his/her regular shifts is noted and compensation is provided by an overtime allowance. 
5. City Compensatory Allowance: The cost of living in cities or urban areas is higher than expected. So to manage these costs, City Compensatory Allowances are provided by certain organizations. 
6. Transport Allowance: Traveling for work from your place of stay costs a lot daily. If an employee finds any difficulty with their travel, then the company compensates this with the travel allowance. 

What is City Compensatory Allowance?

Life in metropolitan cities or urban areas is a bit difficult, because of the high cost of living. But the recruited employees should be given the necessary benefits to manage their living to continue their work.

The companies have improved various facilities for their employees to retain them in the company. When the cost of living is a hindrance, a related allowance should also be provided like the City Compensatory Allowance (CCA).

Whether it is a public sector or a private sector company, when the employee is a resident of a tier-1 or tier-2 city, then they are eligible to avail of CCA.

I. Tier - 1: Cities with a population of more than 1 lakh. 
II. Tier - 2: Cities with populations ranging between 50,000 to 1 lakh. 

The payments that are paid through CCA are not fixed, because it varies from place to place and company to company. Not all companies need to provide a CCA, the respective companies can make the decision.

The amount that is paid as CCA is not calculated based on the basic salary of an individual. This is dependent on the cost of living, pay scale, and grade of the city.

Every city has a particular grade and based on that the allowance is finalized.

Eligibility

There are no eligibility criteria to claim CCA. However, certain conditions are looked upon:

• The employee should be a resident of tier-1 or tier-2 cities. 
• Public and private sector companies can provide CCA. 
• Generally, CCA is offered to low or middle-level employees. 
• High-level employees are not provided with CCA because of their higher pay scale compared to other employees. 
• Residents of tier-1 receive a higher CCA when compared to tier-2. 

Calculation of CCA

The payment of CCA to an employee is entirely dependent on the basic salary structure and pay scale. So for every individual, there will be a different amount credited as City Compensatory Allowance.

The next important factor is the city of the living. When the cost of living is higher, then the CCA provided will also be higher. Not just this, the company policies also differ significantly. A private sector will provide a higher CCA when compared to a public sector company.

As a fixed rate, employees working in Central government departments or Public Sectors have a CCA percentage varying between 10% to 20%. This percentage is calculated based on the Cost of the company(CTC).

A worker's CCA doesn't differ based on his or her position. In the same organization, the Team leader, as well as a laborer, gets the same amount as CCA.

Taxation on CCA

When looking into the limits of CCA offered to an employee, there aren’t any. Every company's policies and regulations differ, so the CCA also differs significantly. There is no explanation of the limits of the City Compensatory Allowance in the income tax law or any other law.

Since there is no limit, the entire amount that is credited under CCA is taxable along with the salary. Though there is no slab rate for CCA taxation, there aren’t any exemptions either. CCA is added to the salary and tax is imposed collectively.

Conclusion

You may wonder what is the need for CCA in an employee’s salary. This is extremely essential when an individual moves from a rural environment to a city for work. These employees might have a difficult time adjusting to life in the city.

So benefiting through CCA could be extremely helpful. Not just that, when the pay scale is low it is always advisable to claim CCA. There are some situations, however, in which CCA is necessary, even though it is entirely taxable.

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References:

https://tax2win.in/guide/city-compensatory-allowance-cca https://www.paisabazaar.com/tax/city-compensatory-allowance/ https://www.bankbazaar.com/tax/city-compensatory-allowance.html#:~:text=City%20Compensatory%20Allowance%20(CCA)%20is,the%20discretion%20of%20the%20employer. https://cleartax.in/s/city-compensatory-allowance https://www.indiafilings.com/learn/city-compensatory-allowance-cca/ https://www.godigit.com/finance/salary/what-is-city-compensatory-allowance https://www.coverfox.com/personal-finance/tax/city-compensatory-allowance/