The Cost to Company (CTC) can be grouped into five broad components for the purpose of determining the tax on salary income under the Income Tax Act, 1961 (‘the Act’) as under:
Basic Salary- is the amount paid as remuneration for services rendered by the employees.
Allowances- are a fixed amount paid monthly to compensate for various expenditures like rent, cost of living, children’s education etc. These are monetary payments and are paid irrespective of the actual spending. E.g. If the employer provides House Rent Allowance (HRA), it shall be grouped as allowance.
Perquisities- are generally reimbursements of expenditure incurred by the employee or the non-monetary facilities provided directly to the employee. E.g. If the company reimburses actual rent payment or provides an accommodation either rent-free or at a lower rent, it is termed as perquisites.
rofits in lieu of salary- P Bonus, commission etc.
Retirement benefits- are deferred compensation arrangements for which payments are made throughout an employee’s service period.
This article discusses one such allowance- City Compensatory Allowance in detail.
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.
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:
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.
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.
