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What is Education Cess? A Detailed Overview

Education cess forms an integral component of the taxation system. Education cess is an additional tax levied on the basic tax liability with the intention to support the government initiatives to finance basic education for children. Earlier, the education cess applicable was 3%, however, while presenting the Budget 2018-19, Finance Minister Arun Jaitley announced replacing it with a 4% health and education cess. In his budget speech, the Finance Minister had the following to say concerning the revised rate, "This will enable us to collect an estimated additional amount of Rs. 11,000 crore", the Economic Times reported. The tax collected by the Government of India under this policy can only be used to fund books, mid-day meals and other essentials for students who cannot afford the same.

What is Cess?

A cess is a government-imposed tax on tax, levied to raise funds for specific reasons. Generally, cess is expected to be levied when there is a need to meet specific expenditure for public welfare and discontinued once the government gets enough funds for that purpose.

The 4% health and education cess is the same for everybody, irrespective of which income tax slab one falls in. However, there will not be any cess if an individual’s income tax liability is zero.

How is Cess Different from Normal Tax?

Cess is different from other taxes collected by the government, like income tax, excise duty, goods and services tax, etc.

The money collected from normal tax flows into the Consolidated Fund of India, which can be allocated for any purpose. However, cess is a different form of tax and while initially it may get credited to the Consolidated Fund of India, it has to ultimately be used for the purpose for which it was collected. For instance, education cess needs to be utilized for education purpose only. Should the amount not be spent for that particular reason, it needs be carried forward and used in the following year. The government cannot use the money for any other reasons.

The government also resorts to levying cess since it is easy to introduce, alter and eliminate, when compared with normal taxes as any modifications to normal tax have to go through many processes. Communications concerning cess can be done easily via a notification to that effect, whereas changes made to normal tax require amendments to be made to the law. An essential point to be noted is that the central government has brought into place a number of cesses, and all of them are not calculated in the similar manner.

Health and Education Cess vide Budget/Finance Act 2018

In the Budget 2018, Finance Minister Arun Jaitley proposed a number of measures to improve public welfare. One of them was to discontinue the 3% education cess on personal income tax and corporation tax, and instead put in place a 4% Health and Education Cess to help take care the education and healthcare needs of below poverty line and rural families. Finance Minister Arun Jaitley said that this will aid in collecting an estimated additional sum of Rs. 11,000 crore.

He added in his Budget speech that it has been decided that by the year 2022, every block that has more than 50% schedule tribe population with at least 20,000 tribal persons, will have an Ekalavya Model Residential School, the Economic Times reported.

How does it impact Taxpayers?

Although cess is not like normal taxes, for taxpayers, it is as good as any other tax since it increases their tax outflow. While an increase in cess on direct taxes raises the tax outflow, cess on indirect taxes may push up the cost of some products, thereby raising the cost of living. With the government’s proposal to put into effect health and education cess, individuals will have to pay 1% extra cess from FY 2018-19.

Education Cess Rate

The government’s intent behind introducing education cess has been to provide and finance quality basic education for students who are not able to afford the same. Although the initial objective was to help students complete primary education, the government soon realized the importance of providing access to quality secondary and higher education as well. To this effect, the Finance Act 2007 introduced an additional secondary and higher education cess of 1%. The education cess rate thus became 2% of the tax payable and secondary and higher education cess totalled 1% of the tax payable. Together, the education cess rate of 3% of the tax payable was charged on all kinds of taxes. In the Budget 2018, the government proposed replacing the 3% education cess with 4% health and education cess from FY 2018-19.

How to Calculate Education Cess:

To understand how education cess is calculated, consider the following example:

Scenario 1 - Mohit’s net taxable income for Assessment Year 2018-2019 amounted to Rs. 5,00,000.

Based on this input, the data as shown in the Tax Calculator page of the Income Tax Department are as follows:

Income Tax after relief u/s 87A is Rs. 12,500
Surcharge is 0
Education Cess is Rs. 250
Secondary and higher education cess is Rs. 125
Total Tax Liability is Rs. 12,875

Scenario 2 - Mohit’s net taxable income for Assessment Year 2019-2020 amounts to Rs. 7,00,000

Based on this input, the data as shown in the Tax Calculator page of the Income Tax Department are as follows:

Income Tax after relief u/s 87A is Rs. 52,500
Surcharge is 0
Health and Education Cess is Rs. 2,100
Total Tax Liability is Rs. 54,600

How is Education Cess Used?

Education cess is collected to help finance the government’s efforts in running education programs and schemes for children from rural and below-poverty-line households. The funds collected are earmarked to meet the following expenses:

To start government-aided schools and colleges
Provide students with the mid-day meals.
To pay salaries to the staff of the government schools and colleges.
To fund special schemes that aim to make education more accessible for children.
In case the government plans to expand the number of educational facilities, then the money collected from education cess can be used to fund such initiatives.

FAQs on Education Cess

What is meant by education cess?

Education cess is an additional tax levied on the basic tax liability with the intention to support the government initiatives to finance basic education for children. In the Budget 2018, Finance Minister Arun Jaitley proposed introducing a 4% Health and Education Cess to help take care the education and healthcare needs of below poverty line and rural families.

How is education cess calculated?

This 3% cess is made up of 2% education cess and 1% of senior secondary education cess. In the Budget 2018, however, Finance Minister Arun Jaitley proposed discontinuing the 3% education cess on personal income tax and corporation tax, and instead putting into place a 4% Health and Education Cess.

What is education cess tax in India?

Prior to the Budget 2018, the education cess applicable was 3%. However, in Budget 2018, Finance Minister Arun Jaitley proposed replacing education cess, including secondary and higher education cess with health and education cess, which is set at 4%.

Is there any education cess on TDS?

According to the Income Tax Department, surcharge and education cess are applicable for TDS purposes in case of tax deduction from salary payment to residents or non-residents.

Why education cess is levied?

Education cess is levied to help finance the government’s efforts in running education programs and schemes for children from rural and below-poverty-line households. The money collected is earmarked to meet the following expenses:

To start government-aided schools and colleges
To pay salaries to the staff of the government schools and colleges
To fund special schemes which aim to make education more accessible
Provide students with the mid-day meals

What is the full form of cess?

The term 'Cess' is a shortened form of ‘assess’.

What is meant by cess tax?

A cess is a government-imposed tax on tax that is levied to raise funds for specific purposes. Generally, cess is expected to be levied when there is a need to meet specific expenditure for public welfare. Once the government has collected enough funds for that purpose, the respective cess gets discontinued.

What is difference between cess and tax?

When compared with cess, tax is a broader term. Cess is an amount that is charged as percentage on the tax amount payable. Cess is different from other taxes collected by the government, like income tax, excise duty, goods and services tax, etc. The money collected from normal tax flows into the Consolidated Fund of India which can be allocated by the government for any purpose they deem fit. However, cess is a different form of tax and while it may initially get credited to the Consolidated Fund of India, but it has to ultimately be used for the purpose for which it has been collected.