Effect of tip leakage flow on through flow and performance of a centrifugal compressor impeller was numerically studied using CFX-TASC flow. Seven different tip clearances were used to consider the influence of tip clearance on performance. Secondary flow and loss factor were evaluated to understand the loss mechanism inside the impeller due to tip leakage flow. The calculated results were circumferentially averaged along the passage and at the impeller exit for quantitative discussion. Tip clearance effect on Performance could be decomposed into inviscid and viscous components using one dimensional equation. The inviscid component is related with the specific work reduction and the viscous component is related with the additional entropy generation. Two components affected Performance equally. while efficiency drop was mainly influenced by viscous loss. Performance and efficiency drop due to tip clearance were proportional to the ratio of tip clearance to exit blade height. A simple model suggested in the present study predict performance and efficiency drop quite successfully.