Education Cess

An education cess meaning an additional tax that is applied to the basic tax liability of a taxpayer. The government applies this cess to generate revenue for funding primary, secondary and higher education in India. Both individuals and corporations must pay education cess at the rates determined during annual budgets.

Before 2018, there was a total education cess on Income Tax of 3% of an individual’s tax payable. It is because, before 2018, the education cess had two components, namely, a primary education cess and an additional secondary and higher education cess. Both of these components were used to develop India’s education system.

However, in 2018, the Central Government increased the education cess to 4% of taxes payable for both individuals and corporations. The increased cess was named the health and education cess, as now the extra amount collected is used for the development of both the health and education sectors in regions with no to fewer facilities in India.

The education cess rate in the Financial Year (2024-25) (AY 2025-26) is 4% over the tax payable. The new health and education cess is distinct from the surcharge, which is only applicable to income above ₹50 lakh.

In consideration of such incomes of ₹50 lakh and above, both the surcharge and cess are applicable, and they are both levied on the basic tax payable and not on the underlying income.

As mentioned earlier, the latest health and education cess rate is 4%, and it is calculated based on the basic tax liability computed after all the deductions as per the Income Tax Act. To understand better how to calculate education cess on Income Tax, let us take the following example.

Suppose, there is an individual named Mr A whose annual income is ₹8 lakh. Mr A contributes ₹40,000 towards his health insurance policy premium and ₹50,000 towards PPF. Moreover, he also invests ₹5,000 each in the National Pension Scheme and Sukanya Samriddhi Yojana. Now, let us do the calculations.

Mr A’s total income is ₹8,00,000

Mr A’s total investments are ₹1,00,000

Total taxable income→ Total income - Total investments→ ₹8,00,000-₹1,00,000=₹7,00,000

Mr A’s basic tax liability under the old Income Tax Act regime will be ₹52,500, on which the cess will be calculated.

Education cess= ₹52,500X 4%= ₹2,100

Total tax liability of Mr A→ ₹52,500+₹2,100=₹54,600

Better Education Quality

The central purpose of collecting tax through the education cess is to use the funds to level the quality of education in India. This is especially true for primary and secondary education in rural and sub-rural areas, where basic education still needs to be improved.

Quality Food

The education cess is used to provide mid-day meals in government schools. It has resulted in lower dropout rates in rural schools and has also helped the government in providing nutritional food to rural children. Better quality food not only helps with a good body but also a healthy mind, and then these children can concentrate better on their education.

Special Programs

The education cess on income tax is also used to fund special educational programs such as the “National Secondary Education Mission” or the “National Program of Education of Skills.” Moreover, the fund helps establish higher education institutions of national importance, such as IITs, IIMs, etc.

Salaries and Supporting Material

The funds from the education cess are also used to provide salaries to educational professionals and compensate those individuals who perform well in their duties. Moreover, the fund also helps in providing new and better educational material and course books to the students.

Digital Education

With changing times, education is also going digital. The education cess fund helps the government provide better digital connectivity to higher education institutions. It gives students access to online educational resources and educational technologies to improve the quality of education.

The education cess collected by the government is utilised for health and education purposes. Here is a brief insight on how the government uses education tax in India:

Consolidated Fund of India

Initially, the revenue collected from the education cess goes to the Central Government’s revenue account, the Consolidated Fund of India (CFI).

Only for Health and Education

The education tax collected from the taxpayers can only be used for health and educational purposes, such as building primary schools in rural areas or equipping government hospitals with better medical instruments.

** Amount Carryforward**

Suppose the tax collected in a financial year cannot be fully utilised; then the unused amount will be carried forward to the next financial year under the same head of education cess. Doing so makes sure that the amount collected is utilised properly for educational purposes and can also be spent in later years.

Fund Recycling

If the objective and projects for which the fund was allocated are successful, the government can reallocate the remaining funds for those projects to other projects and programs.

Education cess is a step by the government to promote education in India. By understanding cess on Income Tax and its impact, taxpayers can contribute towards building a better educational system. Through this article, you must have gotten a good understanding of the education cess that you pay from your pocket.

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