City Compensatory Allowance and its need

City Compensatory Allowance is an allowance provided by an employer (companies- both public and private or any other organisation) to their employees as part of their salary to meet the higher cost of living. It is generally provided to employees of metropolitan cities, tier-1 and tier-2 cities to compensate for their higher living standards. They are fixed monthly payments and are different across different cities, employee designations and organisations. However, for employees of central government or public sector undertaking etc., CCA generally ranges from 10 to 20% of the Cost to Company (CTC). It remains fixed irrespective of the pay scales or employee designations.

They vary from place to place and from company to company mainly because CCA is determined either in accordance with the cost of living index or the company’s employment policies.

No law governs the payment of CCA. Therefore, the above are general practices laid down and are not indicative of any specific rules or regulations. It is pertinent to note that the employer pays these allowances at his discretion and is not compelled by any Act, rules or regulations to do so. Therefore, one cannot enforce the payment of such allowances from their employer and that the employer is free to provide CCA at such terms as he may decide.

Taxability of CCA and other fully taxable allowances

The Act does not provide for any exemptions for CCA and is therefore fully taxable in the hands of the employee.

Few other allowances which are fully taxable under the Act are indicated below:

  • Entertainment Allowance
  • Dearness Allowance
  • Overtime Allowance
  • Fixed Medical Allowance
  • Servant Allowance
  • Project Allowance
  • Tiffin/lunch/dinner Allowance
  • Transport Allowance other than to blind/deaf & dumb/ orthopedically handicapped employees

For tax nerds: As per Section 2(24)(iiib) of the Act, the term ‘income’ includes any allowance granted to the assessee either to meet his personal expenses at the place where the duties of his office or employment of profit are ordinarily performed by him or at a place where he ordinarily resides or to compensate him for the increased cost of living.

Such allowances are income in the hands of the employee and fully taxable unless specifically exempted under the Act as per CBDT Circular No. 701 dated 23 March 1995. The judiciary has upheld this position in various cases.

Such income is also not enlisted as fringe benefits provided by the employer under section 115WB, which requires the employer to remit taxes on such expenditure. Therefore, from the above provisions, we can conclude that CCA shall be taxable in the hands of the employee as ‘Salary’ income.

Difference between City Compensatory Allowance (CCA), House Rent Allowance (HRA) and Dearness Allowance (DA)

The HRA, CCA and DA are often confusing and used inappropriately. Comparisons between the three are drawn out below.

Particulars House Rent Allowance (HRA) Dearness Allowance (DA) City Compensatory Allowance (CCA)
Purpose HRA is provided to an employee to meet his rental expenses  DA is provided to compensate for the inflation/ rising prices CCA is provided to compensate for higher costs of living in bigger cities
Taxability under the Act Partially exempt under section 10(13A) of the Act subject to certain conditions. Fully-taxable Fully-taxable


To summarise, CCA is an arbitrary allowance paid by an employer to compensate for the high living standards. It shall be included as income of the employee for taxation purposes, and tax shall be levied on the entire amount.

CA Abhishek Soni
CA Abhishek Soni

Abhishek Soni is a Chartered Accountant by profession & entrepreneur by passion. He is the co-founder & CEO of Tax2win is amongst the top 25 emerging startups of Asia and authorized ERI by the Income Tax Department. In the past, he worked in EY and comes with wide industry experience from telecom, retail to manufacturing to entertainment where he has handled various national and international assignments.