A cess is a tax on tax. It is levied on the tax collected rather than the income of the taxpayer. For example, if a tax of Rs 200 is payable on Rs 1,000, a cess of 4% would be levied on Rs 200. This works out to Rs 8. Health and Education is levied on Net Taxable Income, after taking into account various deductions and exemptions such as those under Section 80C. It is levied on all types of income such as salary, rent, profits of business and capital gains.
What is a cess
A cess is a tax that can only be used by the government for which it is collected. For instance, the health and education cess applicable in FY 2018-19 can only be spent on its stated objective of meeting the health and education needs of Below Poverty Line (BPL) families. It cannot be used for any other purpose and if unspent, must be carried over for future spending on its designated objective. The Health and Education Cess cannot be given allocated to State Governments and is spent exclusively by the Central Government.
In previous financial years, there was a Secondary and Higher Education Cess of 3%. This was replaced by the Health and Education Cess in Budget 2018, thereby broadening its scope to both the health and education categories.
In India cess is applicable on income tax at all tax slabs. This stands in contrast with surcharge that is only applicable to incomes above Rs 50 lakh. In respect of such incomes (Rs 50 lakh and above), both surcharge and cess are applicable and both are levied on the basic tax payable rather than the underlying income. For example if the tax payable is Rs 20 lakh on an income of Rs 75 lakh, the surcharge would be 10% of Rs 20 lakh and the cess would be 4% of Rs 20 lakh. This works out to Rs 2 lakh and Rs 80,000 respectively taking the total bill to Rs 20 lakh + Rs 2 lakh + Rs 80,000 = Rs 22,80,000.