Cess on Income Tax: Types, How to File and Calculate

What is Cess on Income Tax?

Cess on income tax is a special charge levied by the Government of India in addition to the standard income tax. It is introduced with the specific aim of funding critical public welfare programs, such as health schemes, education initiatives, or infrastructure upgrades.

Unlike general taxes, income tax cess is not a permanent source of revenue and may be withdrawn once its purpose is fulfilled. While the collections are deposited into the Consolidated Fund of India, they are strictly earmarked for the objective for which they were created, ensuring a focused and transparent utilization of resources.

Rate of Cess on Income Tax

The current cess rate on income tax is 4%, referred to as the health and education cess on income tax, and is levied over and above the income tax and surcharge (if any). This charge is mandatory for all types of taxpayers, including individuals, HUFs, companies, firms, or other legal entities. Regardless of the applicable income tax slab, the cess is uniformly levied at 4% on the total tax payable.

The primary objective of this cess on income tax is to enhance funding for public welfare sectors, particularly to improve healthcare infrastructure and make quality education accessible to all sections of society across India.

How to Calculate Cess on Income Tax?

Let’s understand how to calculate the cess on income tax with a simple example:

Suppose Ms Riya has a total taxable income of ₹18,00,000 for the financial year. After applying all eligible deductions, the net income tax payable amounts to ₹3,20,000. The health and education cess on income tax at 4% would be calculated as follows:

This example shows how the cess is added after calculating the base income tax, ensuring that contributions are made towards national health and education initiatives.

Purpose of Collecting Cess on Income Tax

The cess on income tax serves as a focused funding tool for the Indian government to implement and sustain critical initiatives in public health and education. The revenue generated through the health and education cess is specifically directed toward programs that enhance access, affordability, and quality in these vital sectors:

• The government uses the funds to provide mid-day meals to children enrolled in government schools.
• It invests in the construction and improvement of government-sponsored educational institutions.
• A portion of the cess is allocated to pay salaries and enhance training for faculty and staff in public schools and colleges.
• The funds help extend education loans to students at lower interest rates, making higher education more affordable.
• Government schemes such as Samagra Shiksha are financed using this cess to widen access to quality education.
• The cess helps premier institutions, such as IITs and IIMs, establish new campuses in regions lacking such facilities.
• The government uses the cess funds to build and upgrade educational facilities and provide modern learning resources in underserved urban and rural areas.
• The government also utilizes the funds to improve public access to essential healthcare services, especially for the underprivileged.

Different Types of Cess Taxes

The Indian government levies several types of cess to meet specific developmental and welfare objectives. Here is a breakdown of the most relevant cess types, including the widely discussed cess on income tax:

Health and Education Cess

This cess on income tax was introduced in the Union Budget 2018, replacing the earlier 3% education cess with a 4% charge. It is levied to fund health and educational programs for economically weaker sections. The proceeds support initiatives like school infrastructure, teacher training, digital classrooms, and national health schemes.

Road and Infrastructure Cess

This cess is imposed on specific fuels, such as petrol and diesel, and is intended to finance infrastructure development, including highways and rural roads. Two-wheelers, electric vehicles, and hybrid models are often exempt from this cess.

GST Compensation Cess

Under the GST regime, this cess is applied to compensate states for revenue loss resulting from the shift to GST. It applies to specific goods such as tobacco, coal, and luxury cars.

Construction Workers’ Welfare Cess

This cess is charged at 1% of the construction cost and is used to fund welfare schemes for construction workers. It is regulated under the Building and Other Construction Workers’ Welfare Cess Act, 1996.

Cess on Crude Oil

The central government levies this cess at a specified rate (e.g., 20%) on domestically produced crude oil to support the development of the oil sector.

National Calamity Contingent Duty (NCCD)

This duty, though not strictly a cess, functions similarly and is charged on products like cigarettes and chewing tobacco to fund disaster response and relief efforts.

Swachh Bharat Cess

Introduced to support the Swachh Bharat Abhiyan, this 0.5% cess was levied on all taxable services to promote sanitation and cleanliness across India.

Krishi Kalyan Cess

This 0.5% cess was levied on taxable services to finance agricultural and rural development initiatives.

Difference Between Cess and Other Taxes

The Government of India imposes cess on tax such as income tax, GST, and excise duty to raise funds for specific, purpose-driven initiatives. This marks the fundamental difference between tax and cess. Here is a comparative overview:

Difference Between Tax and Cess:

Difference Between Cess and Surcharge:

Conclusion

Cess on income tax is a focused revenue stream introduced by the government to fund specific welfare initiatives such as healthcare, education, and disaster management. Unlike broad-based taxes that cover general expenses, cess is earmarked for particular programs and is often temporary. Its purpose is to ensure rapid and targeted support for areas of national importance without altering the existing tax structure.

FAQs on Cess on Income Tax