Cess on Income Tax (The Complete Guide)

The word cess means the extra tax levied by the government for specific purposes. The government levies cess till it gets enough money for the purpose. Unlike the usual taxes and duties like excise and personal income tax, a Cess on Income Tax is an additional tax besides the existing tax (tax on tax). For example, the government imposed the Swachh Bharat cess for cleanliness activities across India.

 The public pays the cess, added to their tax liability as part of the total tax paid.

A cess is different from taxes as it is an additional tax besides the existing tax (tax on tax). Another difference lies in how the government maintains the revenue recovered from cess. Revenue from taxes like income tax is kept in the Consolidated Fund of India (CFI). The government can use it for any purpose it deems fit. The government credits the revenue from cess to the Consolidated Fund. After a due grant from Parliament, utilizes it for the specified purpose.

Another difference between central taxes and cess is that the profits of a cess may or may not be shared with the state governments, while that of central taxes has to be shared.

Currently, there is only Health and Education cess at 4% of your total taxable income.

What Is Cess Tax with an Example?

Cess is an additional tax above a tax to meet a specific purpose by the government. The government levies different cesses on services it provides to the public. Some of them include

Education cess, Health cess, Road cess or Fuel cess, Clean energy cess, Krishi Kalyan cess, Swachh Bharat cess, etc.

For example, the government levies an education cess to provide mandatory free standard primary education to all people.

How Is the Cess Calculated?

Unlike other taxes, a cess is a tax over a current tax. You should pay cess tax in addition to your tax liability for direct taxes. While for indirect taxes, the producer of goods/services must pay them. Currently, there is only Health and Education cess at 4% of your total taxable income.

Let us see an example of how the calculation of health and education cess works. 

Suppose Mr. A has an annual income of Rs. 7 lakhs. He has spent Rs. 40,000 on a life insurance policy and invested Rs. 60,000 in PPF. His tax calculation after health and an education cess in AY 2022-23 is as follows:

Gross income after deductions u/s 80C- Rs. 7,00,000 – Rs. 1,00,000 = Rs. 6,00,000

Taxable income – Rs. 6,00,000

Taxes applicable under the old regime – Rs. 32,500 (5% of 2,50,000 + 20% of Rs. 1,00,000)

Surcharge applicable – Nil

Tax payable – Rs. 32,500

Health and education cess – Rs. 1,300 (4% of Rs. 32,500)

Total taxes after surcharge and cess – Rs. 33,800

Therefore, Mr. A’s net tax liability for AY 2022-23 is Rs. 33,800.

Thus, the different cess has varied rates of tax. The Cess tax rate for health and education is 4% at present.

What Is Cess Full Form?

Cess is a short form of the word Assess. Spelling is an incorrect association with the word census. The government levies cess for encouraging services like health and education. Governments usually charge cess for evolution and growth in social sectors. 

The government utilizes the revenue generated from cess tax for the growth of specific purposes in our country.

How Educational Cess Used?

The amount generated from the cess tax is used for the development purposes of the nation.  

Educational cess tax allows the government to conduct education programs and schemes. These schemes enhance the quality of education and access in our country. The government may use the money for the following purposes:

1. To pay for students’ mid-day meals.
2. To establish government-sponsored schools and institutions.
3. To pay the salaries of employees in government schools and colleges.
4. To provide education loans at lower interest rates for students.
5. To fund special programs such as the Rashtriya Madhyamik Shiksha Abhiyan, which tries to make secondary education more affordable.
6. To help prominent institutes such as IIT and IIM open more branches in states that do not currently have access to these institutions.
7. To increase the number of educational facilities for children.

Thus, cess includes these numerous benefits for our nation.

Who Has to Pay Cess?

Government imposes a cess only when there is a need to satisfy the specific expenditure for Public welfare. It removes the cess tax once the purpose is met. 

If your income comes under the non-taxable slab of the Income Tax taxation slab, you are not required to pay the cess amount. If you are liable to pay tax, you should pay cess too as recommended by the government for the particular year.

Is Cess a Tax on Tax?

Cess is a tax charged over and above your base tax liability. When the state or the central government looks to raise funds for specific purposes, it imposes a cess additionally. For example, the government levies an education cess to yield extra income for primary, secondary, and higher education. The government removes cess when the purpose gets completed. It is not a primary source of income for the government. It is liable for both indirect and direct taxes.

Is Cess Included in TDS?

Your TDS adds the cess amount only for the tax deduction from the payment of salary to a resident or a non-resident or a foreign company.

Surcharge and education cess are applicable only for this purpose in your TDS. It cannot be included on TDS for any other purpose.

Why Is Cess Imposed?

A dedicated tax collected for a specific purpose and spent only for that purpose and not any other purpose is known as a Cess.

Once the government collects enough money for that specific purpose, it usually stops levying it. Cess is levied on both direct and indirect taxes. 

The government imposes cess for developing various sections of the economy or for social causes. For example, the State Government of Kerala introduced a 1% calamity cess on GST in 2018 after the Kerala floods. The Central Government introduces an education cess, health cess, or sanitation cess. Government levies Swachh Bharat cess for the entire cleaning project of the country. 

What Is the Current Cess Rate?

Currently, you should pay a 4% cess above your basic tax. This 4% is cess on education and health development.

If your net income is more than Rs.50 lakh but less than Rs.1 crore, apart from a 4% cess, you should also pay a 10% surcharge. If your net income increases by Rs.1 crore, your surcharge increases to 15%. 

Bottomline

Cess means the extra tax levied by the government for specific purposes. The government levies cess till it gets enough money for the purpose.

Once the purpose is met, the government stops the cess tax. It is not the primary source of income for the government. At present, you are liable to pay only 4% of your educational and health cess.

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