In taxation parlance, a cess is an extra levy that is collected over and above an individual’s basic tax liability. A cess is governed by the Income Tax laws of India, and many people consider it to be another form of tax.

However, before we start exploring the scope and benefits of education cess, we must hammer home the point that a cess is not like any other tax levied- be it direct or indirect or paid to the Central or State Governments.

What does Cess Denote?

A cess is collected for the welfare of a certain sector. It has end-use limitations. This is the primary difference between a tax and a cess. While taxes can be used wherever needed, a cess will be used only for the ends for which it was collected. Thus, a petroleum cess is useful for overhauling petroleum exploration and refineries. A ‘green’ cess is used only for ensuring environmental betterment, and so on.

In the same vein, an education cess is an extra amount levied for the welfare of the education system of our country. It cannot be used for any other purpose.

What is Education Cess?

This section was tweaked slightly in 2018’s Union Budget. Following is a look at the pre-2018 scenario and then at the current scenario for better understanding.

On analysing tax payments over the last decade, individuals will notice that each year, a small amount is taxed over and above their basic tax output. This amount mostly comprises a number of types of cesses, one of which is an education cess

Before 2018, this cess had two components: A Primary Education Cess and an additional Secondary and Higher Education Cess. Both these components were used to make India’s burgeoning education sector robust and modern. 

Note that any cess, including education cess, is never deducted from an individual’s salary. It is instead deducted from his or her tax payable. Even corporates have to pay this cess each year at rates determined during the annual budgets. 

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Therefore, education cess on income tax is an accurate description of this extra outflow. 

Also, before 2018, the total education cess was fixed at 3% of an individual’s tax payable. This had been the norm for many years.

In 2018, the Central Government increased this cess to 4% of taxes payable for both individuals and corporate. 

This increased cess was named health and education cess. As is obvious, this extra amount collected would be used for the betterment of both the health and the educational infrastructure of far-flung villages and smaller towns where proper schools were missing.

A health and education cess serves a lot more fields than its predecessor. Surveys have found that the top reason for school drop-outs was a lack of high-quality mid-day meals. It is expected that this 4% cess, introduced throughout India, will have enough firepower to address drop-outs and contribute to improving India’s literacy rate from the present 77.7%.

Example of Education Cess Calculation

Following is an example to demonstrate how this cess was calculated. Note that this example showcases the previous 3% regime and not the present one as its nitty-gritty is still being hammered out.

Consider the annual income of Mr Sharma, a private-firm employee. In the chart below, we can see his income and investments, followed by taxes.

Annual income Investments Income Tax payable Cess levied
Rs. 8 Lakhs  Life insurance – Rs. 30,000 Around Rs. 65,000 since IT is being paid only on Rs. 6.8 lakhs [All investments are tax-exempt; hence, liability=Rs. (8-1.2) or Rs. 6.8] 1. Primary education Cess -2% of IT or Rs. 1300

2. Secondary Cess-1% or Rs. 650

Total – Rs. 1950

PPF account contribution-Rs. 40,000 NOTE: Once the 4% cess takes shape pan-India, Mr Sharma’s total outgo on health and education cess will be 4% of Rs 65,000 or Rs. 2600.
Sukanya Samriddhi Scheme – Rs. 20,000
Personal pension scheme – Rs. 30,000
Inclusive of bonuses etc Total investments – Rs. 1.20 lakh

There is, at the moment, some confusion on whether the states will have a part of the amount collected as cess. Given India’s federal structure, such a demand has long been made. While there is no clear solution on this, the Central Government assures that a breakthrough will soon be made via discussion.

Education Cess Meaning: India’s Primary & Secondary Education Improved

Here are some proposals which will take shape gradually as the extra funds enter the system. Note that a cess cannot continue forever; it is withdrawn after its need is exhausted.

  1. Increasing the access to education of tribal and BPL children in the remotest parts of this vast country. The Government is on record stating that any village or block with a majority of tribal residents will soon have an ‘Ekalavya Model Residential School’.
  2. This increased education cess will go towards improving the internet-connectivity of schools and students in remote areas for online classes and continued education. This proposal has gained significant traction in 2020 as the pandemic shuttered all educational institutes, with the academic year gone haywire.
  3. Using this extra sum, the salaries of teachers, para-teachers and other staff at schools nationwide will probably see a hike.
  4. To make 10+2 education more accessible, the Centre had introduced the ‘Rashtriya Madhyamik Shiksha Abhiyan’. The extra cess collected will go a long way in its implementation. 
  5. Finally, more states will have world-class institutes like the IITs and IIMs. There are already proposals of setting up several other branches of AIIMS in several large cities.

According to the latest data available, this 1% hike in this cess- collected now as the health and education cess– will add Rs. 11,000 crore to the Government’s treasury. This extra sum can be used to reinvigorate the country’s educational infrastructure.