The health and education cess is a 4 percent charge added to your income tax and any applicable surcharge in India. It funds government healthcare and education programs, and every taxpayer with a positive tax liability owes it, whether you file under the old regime or the new one. You cannot claim it as a business deduction, and it applies equally to individuals, Hindu Undivided Families, firms, and companies.
The rate has been 4 percent since the Finance Act of 2018, which consolidated the earlier education levies into a single cess “calculated at the rate of four per cent of such income-tax and surcharge so as to fulfil the commitment of the Government to provide and finance quality health services and universalised quality basic education and secondary and higher education.”1India Budget. The Finance Bill, 2018 The 4 percent rate carries forward unchanged under the Income Tax Act, 2025, which takes effect on April 1, 2026.2Press Information Bureau. Understanding The Income Tax Act, 2025
Who Owes the Cess
If you have any income tax liability, you owe the cess. That covers individual filers, Hindu Undivided Families, partnership firms, domestic companies, foreign corporations earning Indian-source income, and every other assessable entity. If your deductions or a rebate reduce your tax liability to zero, the cess is also zero, because 4 percent of nothing is nothing.3Lok Sabha. Lok Sabha Unstarred Questions No. 706 – Cesses and Surcharges
The old regime and the new regime differ in their slab rates and available deductions, but the cess calculation on top of your tax-plus-surcharge figure is identical in both.4Income Tax Department. Individual Having Income from Business or Profession for AY 2026-2027
Non-resident Indians pay the cess on tax owed for Indian-source income, such as rent from Indian property, capital gains from Indian shares, or salary for services performed in India. Income earned entirely outside India is not taxable for NRIs, so no cess applies there.
How to Calculate the Cess
The cess is not applied to your total income. It is applied to your income tax plus surcharge, after any Section 87A rebate. The order matters.
- Compute your income tax using the applicable slab rates.
- Add any surcharge based on your income level. Apply marginal relief if it kicks in.
- Subtract the Section 87A rebate if you qualify for one.
- Apply 4 percent to whatever remains. That is your cess.
- Add the cess to your post-rebate tax-plus-surcharge figure to get your total tax liability.
A Worked Example
Say your taxable income is ₹55,00,000 under the old regime. Your income tax comes to ₹14,12,500. Because your income exceeds ₹50 lakh but is under ₹1 crore, a 10 percent surcharge of ₹1,41,250 applies. Assume marginal relief does not reduce it further. Your subtotal is ₹15,53,750. Four percent of that is ₹62,150, and your total liability is ₹16,15,900.5Income Tax Department. Tax Rates
A simpler case: if your tax is ₹50,000 with no surcharge and no rebate, the cess is ₹2,000, and you owe ₹52,000 in total.
Surcharge Rates That Change Your Cess Base
Because the cess sits on top of the surcharge, the surcharge rate feeds directly into how much cess you pay. For individual taxpayers filing for AY 2026-27:
- Income up to ₹50 lakh: no surcharge.
- ₹50 lakh to ₹1 crore: 10 percent.
- ₹1 crore to ₹2 crore: 15 percent.
- ₹2 crore to ₹5 crore: 25 percent.
- Above ₹5 crore: 25 percent under the new regime, 37 percent under the old regime.
The above ₹5 crore bracket is the only point where the two regimes produce different surcharge rates.4Income Tax Department. Individual Having Income from Business or Profession for AY 2026-2027 Marginal relief prevents a situation where crossing a surcharge threshold by a small amount produces a disproportionately large tax bill. It caps your total tax-plus-surcharge so it never exceeds the tax at the lower threshold plus the excess income above it.5Income Tax Department. Tax Rates
How the Section 87A Rebate Interacts
The Section 87A rebate is subtracted before the cess is calculated. If the rebate wipes out your entire tax, your cess is zero.5Income Tax Department. Tax Rates
Under the new tax regime for FY 2025-26, the rebate covers up to ₹60,000 in tax for taxable income up to ₹12 lakh, effectively making that income tax-free. Under the old regime, the rebate is ₹12,500 for income up to ₹5 lakh. If you land just above the rebate threshold, you lose the entire rebate, and the cess applies to your full tax-plus-surcharge amount. That cliff catches some filers off guard.
Not Deductible as a Business Expense
You cannot claim the health and education cess as a business expense. The Union Finance Minister has confirmed that income tax, surcharges, and any cess on income and profits are all excluded from allowable business expenditures.6Press Information Bureau. Health and Education Cess Not Allowed as Business Expenditure Business owners who are used to netting other government levies against income sometimes miss this. The cess sits firmly on the non-deductible side.
What Happens If You Underpay
The cess is part of your total tax liability, so any shortfall triggers the same interest provisions that apply to income tax underpayment. Three sections of the Income Tax Act cover it:
- Section 234A: 1 percent per month (or part of a month) on unpaid tax when you file late, from the due date to the date you file.
- Section 234B: 1 percent per month if the advance tax you paid falls below 90 percent of your assessed liability.
- Section 234C: 1 percent per month for underpayment against quarterly advance tax installment deadlines.
All three are simple interest, not compounding, but the charges stack when more than one section applies.7Income Tax Department. Interest and Fees The cess-specific portion of any underpayment is usually small because the cess itself is only 4 percent of your tax-plus-surcharge. Most filing software calculates it automatically, so errors tend to come from manual filers who forget to include it or apply the 4 percent to the wrong base.
Where the Money Goes
The cess is labeled for rural healthcare and basic education, but the accounting is less clean than the label suggests. Cess proceeds flow into India’s Consolidated Fund rather than a ring-fenced account. A study commissioned by the Fifteenth Finance Commission found that cess revenue has historically been hard to track, with the Comptroller and Auditor General flagging instances where cess money was used to cover the government’s general revenue deficit rather than its stated purpose.8Fifteenth Finance Commission of India. Cesses and Surcharges – Concept, Practice and Reform The same report noted that when cess proceeds remain unused for their earmarked purpose, the levy starts to resemble an ordinary tax. Unlike general tax revenue, cess collections are not shared with state governments.