What is Cess in Income Tax? How is it calculated?

In India, income tax payers also have to pay 4% health and education cess  . Often people are confused about the meaning and calculation of cess. In this article we will know what is Cess? Why is it imposed? What is its rate at the moment? And, how is it calculated? 

What is Cess in Income Tax? How is it calculated?

Cess Full Form and Meaning in Hindi : The word Cess is a short form of the English word “assess”. “assess” in Hindi means cess, rent or octroi or tax. It also has some other meanings, such as-

  • tax assessment
  • taxation process
  • negotiating
  • assessment

What is Cess? How is it different from major tax?

Cess has been levied in the form of tax levied separately for a particular work. Such as – Education Cess, Health Cess, Road Cess and so on. For the work for which a cess is levied, only the expenditure is incurred on it.

For example, the amount collected from the education cess is spent on primary, secondary and higher education. Whereas with main taxes such as income tax, GST, excise duty etc., there is no such restriction. The amount collected from them is spent by the government on its own works.

If, in a given year, the cess collected is not spent on that particular purpose, then it cannot be used for any other work. The remaining amount is used for the next year for the same purpose.

Cess is not a permanent source of income for the government. It is also removed after its purpose is fulfilled. It is levied on both direct and indirect taxes. 

Like the main taxes, the cess need not be shared with the state governments. It is the central government that keeps it with itself and is spent only on its fixed objectives.

Sometimes the government also imposes Cess to collect money for providing relief on any major disaster. Like in the year 2018, to provide relief to the people affected by the floods in Kerala, 1% calamity cess was imposed on GST.

In the GST (Goods and Services Tax) system also, cess is levied on some luxurious and harmful goods (sin goods and luxury items). It has been named as GST Compensation Cess. This cess is levied on cigarettes, pan masala, aerated drinks, coal, certain types of vehicles and some other such harmful and luxurious items.

Often, the cess is levied separately and on top of the main tax, hence it is also called tax on tax .

What is Health and Education Cess?

In the 2018 budget, the central government announced the implementation of 4% Health and Education Cess. Its purpose was to provide more benefits to the people living below the poverty line in the field of education and health. According to the government’s assessment, it will get Rs 11000 crore every year from this, which it will be able to spend on improving education and health services.

For example, with the help of this, the government’s plan is going to open “Eklavya Model Residential School” in all such blocks by the year 2022, where there is at least 50 percent tribal population, and not less than 20 thousand. This cess was brought in by removing the already existing 3% education cess.

What is the rate of Cess on Income Tax

Health and Education Cess has to be paid by all those taxpayers, who have some tax liability on their annual total income. At the moment, it is charged at 4%. Irrespective of how high or low your tax liability is, you will have to pay 4% of the tax liability as Health and Education Cess. 

Let’s say that on the basis of your annual income, the tax liability is fixed at Rs 10,000. So you will have to pay 4 percent of Rs 10,000 i.e. Rs 400 as Education and Health Cess separately.

How is calculated Health & Education cess

  1. Gross Total Income: Gross Total Income is determined by adding up the total income from all sources of income during the entire financial year. These are the five sources of income
    • Salaries/Wages
    • Income from house property
    • profits and gains of business or profession
    • income from capital gains
    • income from other sources (interest, prize, lotteries, winnings in competitions, etc.)
  2. Taxable Income: Your annual gross total income, out of which tax-saving expenses and investments are excluded. If you are employed then standard deduction of Rs 50,000 is also taken out. In this way your Taxable Income is fixed.
  3. Income Tax: On taxable income , your income tax is calculated according to the income tax slab  . 
  4. Surcharge:  If your annual total income is between Rs 1 crore to Rs 10 crore, then a surcharge of 2% of the total income tax will also have to be paid. Surcharge will be applicable at the rate of 5% if the total annual income exceeds Rs.10 crores. 
  5. Cess: Let us assume that an individual has a total tax liability of Rs.50,000. He will have to pay an additional 4% of his income tax liability in the form of health and education cess. 50 thousand is 4 percent = 2000 rupees. In this way, he will have to finally pay a total of 52 thousand rupees to the Income Tax Department. This will include Rs 50,000 as income tax and Rs 2,000 for health and education cess.

Origin and development of Cess

Originally the word cess was used in Ireland , while it was part of the United Kingdom of Great Britain and Ireland. Later the word rate was used in its place. This term was used for local taxation.

During the British rule in India, it was used for the tax collected for a particular purpose. Such as irrigation-cess, education-cess etc.

Example fo some major cess used in India

We are also giving here the names of some of the major cesses in circulation in India and their brief introduction.

Swachh Bharat Cess: It was implemented in the year 2015. Across the country, its money was to be spent to keep the roads, streets and other infrastructure clean. It used to be at the rate of 0.5%.

Krishi Kalyan Cess: It was implemented in 2015. The money collected from this was to be used to accelerate the development of the agricultural economy. It was charged at the rate of 0.5%.

Road and Infrastructure Cess: This cess was imposed in the year 2016. This cess was levied on the production of vehicles from the companies producing the vehicles. It is levied at the rate of 1%/2.5%/4% for different categories of vehicle production.

At present, these have been merged with the GST applicable from 1st July 2017. Some of the other cess which are still in vogue are-

  • primary education cess
  • Secondary Education Cess
  • road cess
  • Cess on crude petroleum oil
  • NCCD on Tobacco and its products
  • Education Cess on Imported Goods

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