What is Education Cess on Income Tax? Definition and Examples

Introduction

You calculate your income, apply the slab rates, and arrive at a final tax figure. You think you are done. But then, you look at the bottom of the tax computation sheet and see an additional line item adding a few thousand rupees more to your liability. This is the "Health and Education Cess."

For many taxpayers, this feels like a hidden charge. You might wonder why the government charges this extra amount when you are already paying 30% tax. Is it a temporary surcharge? Where does this money actually go?

In simple terms, a "Cess" is a tax on tax. Unlike regular income tax, which goes into the government's general pot to be spent on anything from defense to salaries, a cess is a "marked" fund. The money collected here can strictly be used only for the specific purpose of health and education. In this guide, we will decode the 4% Health and Education Cess, how it applies to your income in 2025, and the correct order of calculation to avoid errors.

Table of Contents

1. What is Health and Education Cess?
2. Current Rate for FY 2025-26
3. Difference Between Tax, Surcharge, and Cess
4. How to Calculate Education Cess (Step-by-Step)
5. Practical Examples (Old vs New Regime)
6. Is Education Cess Deductible as a Business Expense?
7. Who is Exempt from Education Cess?
8. History: From 3% to 4%
9. Penalties for Non-Payment
10. FAQs

What is Health and Education Cess?

The Health and Education Cess (HEC) is an additional levy collected by the Central Government on the basic tax liability of a taxpayer.

It was introduced to fund the educational and healthcare needs of the poor. Specifically, the proceeds from this cess are directed into non-lapsable reserve funds like the Prarambhik Shiksha Kosh (for primary education) and the Madhyamik and Ucchatar Shiksha Kosh (for secondary/higher education).

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Current Rate for FY 2025-26

For the Financial Year 2025-26 (Assessment Year 2026-27), the rate of Health and Education Cess is 4%.

This rate applies to all categories of taxpayers, including:

• Individuals (Salaried and Self-employed)
• HUFs
• Companies (Domestic and Foreign)
• Firms and LLPs

It does not matter if you choose the Old Tax Regime or the New Tax Regime; the 4% cess is mandatory in both.

Difference Between Tax, Surcharge, and Cess

To calculate your final liability, you must understand the hierarchy of these three charges.

1. Income Tax: This is the base charge calculated on your total income according to slab rates (e.g., 5%, 20%, 30%).
2. Surcharge: This is a tax on super-rich taxpayers. It applies only if your income exceeds ₹50 Lakhs. It is calculated on the Income Tax amount.
3. Cess: This is the final layer. It is calculated on (Income Tax + Surcharge).

How to Calculate Education Cess (Step-by-Step)

The formula is strict. You cannot calculate cess on your gross income.

The Formula:

Total Tax Payable = (Basic Tax + Surcharge) + 4% of (Basic Tax + Surcharge)

Step 1: Calculate tax on taxable income as per the slabs.

Step 2: Add Surcharge (if applicable).

Step 3: Calculate 4% on the total of Step 1 and Step 2.

Step 4: Add the result of Step 3 to the total.

Practical Examples (Old vs New Regime)

Scenario 1: Middle Income Earner (No Surcharge)

• Taxable Income: ₹15,00,000
• Tax Regime: New Regime (2025 Slabs)
• Basic Tax: ₹1,50,000 (Hypothetical calculation based on slabs)
• Surcharge: Nil
• Base Liability: ₹1,50,000
• Health & Education Cess: 4% of ₹1,50,000 = ₹6,000
• Total Tax Payable: ₹1,56,000

Scenario 2: High Income Earner (With Surcharge)

• Taxable Income: ₹60,00,000
• Basic Tax: ₹18,00,000 (Approx)
• Surcharge (10%): ₹1,80,000
• Total Base Tax: ₹19,80,000
• Health & Education Cess: 4% of ₹19,80,000 = ₹79,200
• Total Tax Payable: ₹20,59,200

Notice: The cess was calculated on ₹19.8 Lakhs, not just on the basic tax.

Is Education Cess Deductible as a Business Expense?

This has been a point of massive litigation. Many businesses argued that "Cess" is not "Tax" and therefore claimed it as a business expense to lower their profits.

However, the Finance Act, 2022, clarified this retrospectively.

The Verdict: Income Tax and any Surcharge or Cess levied on it are NOT deductible expenses under Section 40(a)(ii). You cannot treat the 4% cess as a business cost. It is a portion of profit shared with the government.

Who is Exempt from Education Cess?

There are very few exemptions.

• If your Total Income is below the taxable limit (e.g., ₹3 Lakhs or ₹7 Lakhs with a rebate), your tax liability is zero. Since 4% of Zero is zero, you effectively do not pay cess.
• However, if you have any tax payable (even ₹100), the 4% cess is added automatically.

Also read: Section 87A - Income Tax rebate under Section 87A

History: From 3% to 4%

Before 2018, the structure was different.

• Until 2018: We had a "Primary Education Cess" of 2% and a "Secondary & Higher Education Cess" of 1%. Total = 3%.
• Budget 2018: The Finance Minister replaced these two with a consolidated "Health and Education Cess" and raised the rate to 4%. This was done to fund the flagship Ayushman Bharat health scheme alongside education.

Penalties for Non-Payment

Since Cess is part of the total "Tax Payable," failure to pay it attracts the same penalties as failure to pay income tax.

• Interest under Section 234B and 234C applies to the total amount (Tax + Cess).
• If you receive a demand notice, the final figure always includes the cess component.