Education cess consists of Primary Education and Secondary and Higher Education Cess making up 3% of the tax payable. It is used to fund salaries, mid-day meals, infrastructure, special schemes, and premier educational institutions in the country.
What is Education Cess?
Every time you pay taxes you will notice that the total tax payable by you tends to go up a tiny amount when it comes to the final payment. This tiny amount can be an increase of a few percentages and is generally the education cess that is levied on the taxes. This tax is only levied on the tax that you have to pay and not on the income that is considered taxable. The cess is levied in two parts, the first being the Primary Education Cess and the second being the Secondary and Higher Education Cess. This cess is a part of income tax and is governed by the IT Act. The rate of the education cess is announced by the government when the budget is announced for the year.
Education Cess Rate
The rate at which education cess is calculated is actually a combination of the two types of cess applied on the taxable income. For the education cess the rate is 2% of the tax payable and for the Secondary and Higher Education Cess the rate is 1% of the tax payable. Together they form the education cess rate of 3% of the tax payable.
How to Calculate Education Cess?
Let us take the example of Aneesh. He has an annual income of Rs. 8 lakhs out of which he invests Rs. 30,000 in life insurance and contributes Rs. 40,000 towards a PPF account. He also makes a contribution to the Sukanya Samriddhi Account to the tune of Rs. 20,000 and invests Rs. 30,000 in a pension scheme. This means that his total investments amount to Rs. 1 lakh in a year which brings his taxable income down to Rs. 7 lakhs.
Based on his investments, the tax that he will have to pay is Rs. 65,000. On this tax he will pay education cess of:
Primary Education Cess: Rs. 1,300 at a rate of 2% of the tax payable, i.e. Rs. 65,000.
Secondary and Higher Education Cess: Rs. 650 at a rate of 1% of the tax payable.
This means that the total education cess that will be payable will be Rs. 1,950 which means that the income tax due for Aneesh is Rs. 66,950.
However, it needs to be remembered that since the education cess is only payable on the tax due so if your income falls in the non-taxable bracket of the income tax slab, you won’t have to pay this cess.
How is Education Cess Used?
As the name suggests, this is a cess that is collected to enable the government to run education programs and schemes that can help improve the quality and access to education in the country. The money that has been collected by the government is earmarked for the following expenses:
- The cess is used to provide students with the mid-day meals.
- It is also used for setting up government aided schools and colleges.
- The staff of the government schools and colleges are also paid their salaries using this money.
- The government can also use this money to set up education loans that are provided at lower rates to students to help them pay the fee for higher education.
- It can also be used to fund special schemes like the Rashtriya Madhyamik Shiksha Abhiyan that aims at making secondary education more accessible.
- The money may also be used to fund premier institutes like IIT and IIM in the setting up of more branches in states that still don’t have access to these institutes.
- If the government plans on expanding the number of educational facilities for children, then the money collected as education cess can be used to fund the programs.