Cess on Income Tax: A Comprehensive Guide

What is Cess?

Definition and Purpose

Cess is a term you often encounter while learning about the income tax concepts. It is an additional tax levied by the government to fund specific initiatives. Though a minor component of your overall tax liability, understanding how cess works can provide better clarity on your financial obligations.

Cess is a tax the government imposes for specific purposes, such as healthcare, education, or environmental initiatives. Unlike other taxes that contribute to the consolidated fund of India, the cess on income tax is earmarked for specific causes. The funds collected through cess are not shared with states and are used solely for the intended purpose.

Historical Context of Cess in India

The concept of cess has existed since the British era. It began with a levy on matches during the British era, and post-independence, it focused on industry-specific development, such as the Salt Cess and Tea Cess in 1953. 

Later, it shifted to labour welfare with the Iron Ore Mines Labour Welfare Cess (1961), Limestone and Dolomite Mines Labour Welfare Cess (1972), and Cine Workers Welfare Cess (1981). Over time, the government has introduced various cesses to support broader initiatives like the Swachh Bharat Cess, which funds cleanliness and sanitation programs.

Types of Cess Levied in India

Health and Education Cess

The Health and Education Cess is a 4% income tax and surcharge levied on health and education. It was introduced to fund healthcare and educational initiatives nationwide, replacing the previous Education Cess and Secondary and Higher Education Cess.

Other Cesses (e.g., Krishi Kalyan Cess, Clean Energy Cess)

Apart from the Health and Education Cess, other cesses have been levied in the past, including:

• Krishi Kalyan Cess: A 0.5% cess on all taxable services to improve agriculture.
• Clean Energy Cess: Levied on coal, lignite, and peat to promote clean energy initiatives.
• Swachh Bharat Cess: Imposed at 0.5% to fund the Swachh Bharat Abhiyan.
• Road and Infrastructure Cess: Rs. 1.50 per litre on petrol and high-speed diesel to fund road development projects.
• GST Compensation Cess: Levied on specific goods to compensate states for GST revenue loss.
• Construction Workers Welfare Cess: 1% of the construction cost, paid by employers under the BOCWW Cess Act, 1996.
• National Calamity Contingent Duty (NCCD): Imposed on cigarettes, chewing tobacco, and pan masala; increased by 16% on specific cigarettes in Budget 2023.

Cess on Income Tax: A Detailed Explanation

How Cess is Calculated

Cess is calculated as a percentage of the total income tax liability, including any applicable surcharge. The Health and Education Cess is currently applied at 4% on the income tax plus surcharge. For instance, if your income tax liability is Rs. 50,000 and a surcharge of Rs. 10,000 applies, the income tax cess calculation will be 4% of Rs. 60,000, i.e., Rs. 2,400.

Cess Rate and Its Application

The current cess rate applicable on income tax is 4%. This rate is uniform for all taxpayers, irrespective of their income slab and the chosen tax regime (old or new). The cess is added to the income tax liability, increasing the overall tax outflow.

Inclusion of Cess in Taxable Income

Cess is not included in the calculation of taxable income. Instead, it is calculated on the tax liability after applying applicable deductions, exemptions, and surcharges. Say your tax liability as per the income slab comes to Rs. 1,40,000, and the applicable deductions amount to Rs. 30,000. The cess will be calculated on Rs. 1,10,000 (140000 – 30000 deduction). This ensures that cess is a separate component of the overall tax liability.

Impact of Cess on Overall Tax Liability

While the rate of cess on income tax may seem minimal, it can significantly impact the overall tax liability, especially for high-income earners. Since the cess is calculated on the income tax and surcharge, the final tax outflow increases, affecting the taxpayer’s financial planning. Thus, understanding cess as a part of the income tax basics becomes important.

Who Pays Cess on Income Tax?

Eligibility Criteria

Every taxpayer, including individuals, HUFs, firms, companies, and NRIs, must pay cess on their income tax. The rate is uniform for all taxpayers, regardless of their income slab. 

Taxpayers Subject to Cess

Cess applies to:

• Salaried individuals earn income from salary, investments, and other sources.
• Businesses and corporations liable to pay income tax.
• Non-resident Indians (NRIs) earning taxable income in India.

Exemptions and Deductions Related to Cess

There are no specific exemptions or deductions available for cess. It is calculated as a percentage of the total tax liability and must be paid in full. However, individuals in the old and new tax regimes can claim certain deductions that reduce their overall taxable income, thereby indirectly reducing the cess amount.

Different Tax Regimes and Cess

New Tax Regime and Cess Calculation

Under the new tax regime, cess is calculated at 4% on the income tax payable after considering the applicable tax rates and slabs. Deductions under sections like 80C and 80D are not available, but the cess rate remains the same.

Old Tax Regime and Cess Calculation

In the old tax regime, the calculation and rate of cess on income tax remain the same, but the taxpayer can claim deductions under various sections, including 80C, 80D, and 80G, which can reduce the taxable income and, consequently, the cess amount.

Comparison of Cess under Both Regimes

While the cess rate of 4% remains the same in both regimes, the old regime provides opportunities to reduce taxable income through deductions. The new regime, though simpler, offers no such deductions, leading to a potentially higher taxable income and, therefore, a higher cess amount. Thus, understanding how cess affects your overall tax liability is crucial when determining what is income tax and how it is calculated under different regimes. 

Surcharge vs. Cess

Defining Surcharge

A surcharge is an additional charge levied on the income tax of high-income earners. It is calculated as a percentage of the income tax based on specific income slabs and is intended to target high-income taxpayers.

Differences Between Surcharge and Cess

• Purpose: A surcharge is imposed to generate additional revenue from high-income taxpayers, whereas a cess is levied for specific purposes like education, health, or infrastructure development.
• Applicability: The surcharge applies only to high-income individuals and corporations (e.g., individuals earning over Rs. 1 crore pay a 10% surcharge), while the cess is charged to all taxpayers, regardless of income level.
• Rate Structure: Surcharge rates are progressive, with higher rates for higher income brackets. Conversely, Cess is charged at a fixed rate, such as the 4% Health and Education Cess.
• Calculation: The surcharge is calculated based on the income tax amount. The cess is calculated based on the total of income tax and surcharge amount.

Combined Impact of Surcharge and Cess

Both surcharge and cess increase the overall tax liability. High-income earners face a double impact as both surcharge and cess are calculated on their tax liability. For instance, if a taxpayer falls under the 30% tax slab and a 10% surcharge applies, the cess is calculated on the combined tax and surcharge amount.

Frequently Asked Questions (FAQs)

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