What is a Cess?
Cess is a type of additional charge levied on top of the tax liability by the government. It is an additional tax levied by the Indian government to raise funds for specific purposes aimed at the public's welfare. It is to be paid over and above the income tax at the rates specified by the government. A cess is discontinued when the objective of such cess is met. It is to be paid only by those assessees who have taxable income.
What is the Rate of Cess on Income Tax?
A 4% Health and Education Cess applies to the total income tax amount, including any surcharge. This cess is mandatory for all types of taxpayers, including individuals, HUFs, AOPs, BOIs, artificial juridical persons, firms, local authorities, cooperative societies, and companies.
What is Health and Education Cess in Income Tax?
The health and education cess is an additional tax that is levied by the Indian government to fund the education and healthcare needs of rural and below poverty line families in India. This tax is paid over and above the basic tax liability. Not just individuals but also companies are required to pay health and education cess.
The government uses the money received in the form of health and education cess to facilitate health care needs and to improve the educational infrastructure in the country, provide access to quality education and schemes like mid-day meals. It is also used to provide educational loans to low-income families.
How is Health & Education Cess(HEC) Calculated?
Currently, the government levies a 4% health and education cess on Income Tax. Given below is an illustration of how to calculate health and education cess on the tax liability.
Health and education cess is calculated as a percentage of the basic tax liability computed after all the deductions as per the Income Tax Act. Let us understand this with an example -
Aman has an annual income of ₹8,00,000, ₹40,000 is his insurance premium, and ₹50,000 is his contribution towards PPF. His other investments include Sukanya Samriddhi Yojana and the National pension scheme at 5000 each.
Aman’s total investments = ₹1,00,000
Total Income = ₹8,00,000
Total Taxable Income = Total Income - Total Investments = 8,00,000 - 1,00,000 = ₹7,00,000
Mr. Aman’s basic tax liability under the old tax regime as per the Income Tax Act will be ₹44,200.
Now the cess will be calculated on ₹44,200
Education cess = ₹44,200 x 4% = ₹1768
Total tax liability = ₹44,200 + ₹1768 = ₹45,968
What is the Purpose of Collecting Cesses?
The health and education cess as the name suggests is collected by the government for various purposes related to the improvement of healthcare and educational infrastructure for rural and below poverty line families. Here are some uses of collecting cesses -
- Funds mid-day meal programs for students.
- Establishes government schools, colleges, and institutions.
- Pays salaries of employees in government educational institutions.
- Provides low-interest education loans for higher studies.
- Supports programs like Rashtriya Madhyamik Shiksha Abhiyan to make secondary education affordable.
- Helps IITs and IIMs open branches in underserved states.
- Expands educational facilities for children.
- Finances quality healthcare services.
Other Types of Cesses in Income Tax
Here are the other types of cesses under Income Tax -
- Road and Infrastructure Cess: Levied on petrol, diesel, and heavy vehicles; ₹1 per litre for petrol and diesel.
- GST Compensation Cess: Charged on luxury and demerit goods, except for GST composition or exports.
- Construction Workers’ Welfare Cess: Employers pay 1% of construction costs under the BOCWW Act.
- Cess on Crude Oil: A 20% ad valorem cess applies to domestically produced crude oil and natural gas.
- National Calamity Contingent Duty (NCCD): Imposed on cigarettes, tobacco, and pan masala; raised by 16% in 2023.
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