Health and education cess

The health and education cess is an additional surcharge of 4% charged on the income tax a taxpayer pays as increased by any surcharge. Section 3(15) of the Finance Act 2026 names it in those words, “an additional surcharge, for the purposes of the Union, to be called the Health and Education Cess on income-tax”, and fixes the rate at 4% of such income-tax and surcharge. It is not a tax on income. It is a percentage of the tax already computed, and it raises the final bill of every central government employee and pensioner with anything left to pay.

The cess sits at the very end of the computation, after the slabs, after the Section 87A rebate and its successor Section 156, after marginal relief, and after the surcharge. That position is what makes it easy to miss and impossible to plan around. One rate applies to everyone: 4%, in the new tax regime and the old tax regime alike, at Rs. 6 lakh and at Rs. 6 crore, with no threshold, no exempt category and no marginal relief of its own. The only taxpayers who escape it are those whose tax is already nil.

The rate has been 4% since the Finance Act 2018 replaced a 3% education cess that had itself been assembled from two separate levies, a 2% education cess of 2004 and a 1% secondary and higher education cess of 2007. For the tax year 2026-27 the Finance Act 2026, No. 4 of 2026, which received assent on 30 March 2026, holds the rate at 4% in both of its charging sections.

This article sets out what the cess is in statutory terms, its rate and history, exactly where it falls in the order of computation, why it carries no threshold and no marginal relief, how it behaves in deduction at source and in advance tax, worked examples at four income levels, its effect on the top rate of tax, what it funds, and how it carries into the Income-tax Act 2025.

What the health and education cess is

The health and education cess is a cess in name and an additional surcharge in law. Section 3(15) of the Finance Act 2026 takes the income tax specified in sub-sections (1) to (5), as increased by the applicable surcharge, and provides that it “shall be further increased by an additional surcharge, for the purposes of the Union, to be called the Health and Education Cess on income-tax, calculated at the rate of 4% of such income-tax and surcharge”. The drafting matters, because it settles the base: the cess attaches to income tax plus surcharge, never to income.

The same provision states the purpose in the levying words themselves. The cess is charged “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”. That clause has stood unchanged in the levying provision since the Finance Act 2018 introduced it.

Because the base is tax rather than income, the cess cannot be planned around. A deduction under Section 80C or Section 80D reduces income, which reduces the tax, and the cess follows the tax down without any separate relief of its own. Halve the tax and the cess halves. Reduce the tax to nil and the cess is nil. There is no threshold below which the cess is not charged, and no rebate against it.

The rate for the tax year 2026-27

The rate is 4%, and the Finance Act 2026 fixes it in three separate places. Section 2(6) charges it for the assessment year commencing on 1 April 2026 under the Income-tax Act 1961. Section 3(15) charges it for the tax year commencing on 1 April 2026 under the Income-tax Act 2025, on the regular charge. Section 3(16) charges it on the deduction, collection and advance tax cases in sub-sections (6) to (14) of the same section.

Two charging sections in one Act is the signature of the transition year. Section 2 finishes the job of the Income-tax Act 1961 for income earned in 2025-26 and assessed in 2026-27. Section 3 opens the Income-tax Act 2025 for the tax year 2026-27, which is the financial year running from 1 April 2026. Neither section changes the rate. A reader comparing a 2025-26 computation with a 2026-27 one will find the same 4% on both, reached through different section numbers.

Where the cess falls in the order of computation

The cess is the last step, and the order ahead of it is fixed by statute rather than by convention. Getting it right matters because two of the steps, the rebate and marginal relief, run before the cess and therefore shrink its base, while the surcharge runs before it and enlarges it.

1. Compute the slab tax on total income, under the new regime at the Section 202 rates or under the old regime.
2. Subtract the Section 87A rebate, which is Section 156 under the Income-tax Act 2025, and apply the marginal relief available just above the rebate limit.
3. Add the surcharge where the income crosses Rs. 50 lakh, Rs. 1 crore, Rs. 2 crore or Rs. 5 crore, and apply marginal relief at the threshold.
4. Charge the 4% health and education cess on the total of the tax after rebate and relief plus the surcharge after relief.

Section 156 of the Income-tax Act 2025 grants the rebate “from the income-tax (computed before allowing the deduction under this section)”, which places the rebate squarely on the tax and therefore ahead of the cess. A salaried employee whose tax is extinguished by the rebate pays no cess, because step 4 has nothing to work on. An employee whose tax survives the rebate pays 4% of what is left.

No threshold, no marginal relief, no cap

The cess has none of the three softening devices that appear elsewhere in the rate structure. There is no threshold, no marginal relief, and no ceiling.

Marginal relief is the one worth stating precisely, because taxpayers near Rs. 50 lakh often assume it covers the whole liability. It does not. Section 3(5) of the Finance Act 2026 sets the relief by the formula Tn = Rn + Sn, and defines Tn as “the total amount beyond which the total amount payable as income-tax and surcharge thereon shall not exceed”. The formula names income tax and surcharge. It does not name the cess. So the relief caps the tax and the surcharge, and the 4% cess is then charged on that capped figure and rises with it.

A taxpayer at Rs. 50,05,000 in the old regime illustrates the point. Marginal relief holds the tax plus surcharge to the tax on Rs. 50 lakh plus the Rs. 5,000 of excess income. The cess of 4% is then computed on that relieved figure, adding roughly Rs. 52,000 that no relief touches. The relief is real and worth claiming; it simply stops one step short of the last line.

Both regimes, at every income

The cess does not differ between the regimes, and that is unusual. The standard deduction differs, at Rs. 75,000 in the new regime and Rs. 50,000 in the old. The rebate differs. The surcharge differs, capped at 25% in the new regime against 37% in the old. The cess is 4% in both.

That uniformity is why the cess almost never features in a regime comparison. It multiplies the tax under both regimes by the same 1.04, so it cannot change which regime is cheaper. The break-even point between the regimes sits at the same income whether or not the cess is included, which is why the figures on this site are usually quoted with it already added. Where the cess does change a decision is in cash-flow planning: an employee estimating the year’s liability from slab tables alone will be 4% short.

Nor does the cess spare any class of income. Section 3(15) charges it on the income tax specified in sub-sections (1) to (5) of the section, and sub-section (3) is the provision that applies the special rates in the Chapter XIII provisions of the Income-tax Act 2025. Long-term capital gains taxed at a special rate, short-term gains on listed equity, and lottery and game-show winnings all carry the same 4%.

The cess in deduction at source

Deduction at source is where the cess produces its one visible inconsistency, and the inconsistency is deliberate. A central government employee sees the cess inside the monthly deduction from salary. The same employee sees no cess in the deduction the bank makes from fixed deposit interest. Both are correct.

Salary is charged with the cess. Section 3(10)(ii) of the Finance Act 2026 brings income-tax to be deducted from income chargeable under the head “Salaries” under Section 392 of the Income-tax Act 2025 to the rates in Part III of the First Schedule, and Section 3(16) then charges the 4% cess on the tax so computed. The drawing and disbursing officer therefore estimates the year’s liability inclusive of the cess and spreads it across twelve months, which is why the figure in Form 16 already carries it.

Other deduction at source is not charged with the cess where the payee is resident. Section 3(17)(i) provides that Section 3(16) “shall not apply to cases in which tax is to be deducted or collected under the sections of the said Act mentioned in sub-sections (7), (8) and (9), if the income subjected to deduction of tax at source or collection of tax at source is paid to a domestic company and any other person who is resident in India”. A bank deducting from a resident depositor deducts the bare rate. The cess on that interest income remains payable; it is simply collected later, through advance tax or self-assessment tax, rather than at source.

This is the reason a reconciliation of Form 26AS against the final liability rarely lands on zero for anyone with non-salary income. The credits shown are bare of cess for resident payments and inclusive of it for salary.

The cess in advance tax and self-assessment tax

Advance tax carries the cess in full. Section 3(10)(iv) of the Finance Act 2026 brings advance tax payable under Chapter XIX-C of the Income-tax Act 2025 to the Part III rates, and Section 3(16) applies the 4% cess to it. An instalment worked out from the slab table alone is short by 4% of the tax, and a shortfall of that size is more than enough to attract interest for deferment.

The practical rule for a pensioner or an employee with interest income is to compute the whole year’s tax including the cess, subtract the credit for tax already deducted at source, and pay the balance in instalments. The income tax calculator on this site applies the cess automatically at the last step, as does every departmental computation.

The cess for a central government pensioner

A service pension carries the cess in exactly the same way as a salary, because it is taxed under the same head. Section 15(2) of the Income-tax Act 2025 treats a former employer as an employer and Section 16(b) brings any pension within salary, so the pension disbursing bank deducts under Section 392, and Section 3(10)(ii) with Section 3(16) of the Finance Act 2026 puts the 4% cess inside that deduction. A pensioner reading a pension slip is therefore already seeing the cess, folded into the monthly figure rather than shown on a line of its own.

Family pension reaches the cess by a different route and arrives at the same place. It is taxed under income from other sources rather than under salary, with the deduction of one-third capped at Rs. 25,000 under the new regime granted by Section 93(1)(d) of the Income-tax Act 2025. The cess is charged on whatever tax that computation produces, at the same 4%, because Section 3(15) attaches to the income tax and not to the head it came from.

The timing differs for a senior citizen. Section 403(3) of the Income-tax Act 2025 relieves a resident individual aged 60 or more with no income from business or profession of the liability to pay advance tax. Such a pensioner does not pay the cess in quarterly instalments; it is settled with the return as self-assessment tax, on the balance left after the credit for tax deducted from the pension.

Worked examples

New regime, salary below the rebate limit. A salaried employee with a gross salary of Rs. 12,50,000 in the new regime claims the Rs. 75,000 standard deduction, brings total income to Rs. 11,75,000, and has the resulting tax extinguished by the Section 156 rebate. Tax is nil, so the cess is nil. Nothing is deducted and nothing is payable.

New regime, moderate income. An employee with a tax after rebate of Rs. 20,000 and no surcharge pays a cess of 4% of Rs. 20,000, that is Rs. 800, for a total of Rs. 20,800. The Rs. 800 appears inside the monthly deduction, at roughly Rs. 67 a month.

Old regime, tax of Rs. 1,00,000. The cess is Rs. 4,000 and the total is Rs. 1,04,000. There is no scope to reduce the Rs. 4,000 by any further claim, because every deduction and the rebate have already been applied in arriving at the Rs. 1,00,000.

Old regime with surcharge. A senior officer with an income tax of Rs. 15,00,000 and a surcharge of Rs. 1,50,000 pays a cess of 4% of Rs. 16,50,000, that is Rs. 66,000, for a total of Rs. 17,16,000. The cess here is charged on the tax and the surcharge together. Computing 4% on the Rs. 15,00,000 alone understates the liability by Rs. 6,000.

Rounding of the final figure

The cess is computed to the paisa and then disappears into a rounded total, which is why a hand computation and a departmental one can differ by a few rupees without either being wrong. Section 516 of the Income-tax Act 2025 requires the amount of total income, and the amount payable or refundable, to be rounded off to the nearest multiple of Rs. 10, ignoring any part of a rupee.

Rounding operates on the amount payable, which is the figure arrived at after the cess has been added, and not on the cess as a separate item. A tax of Rs. 20,412 attracts a cess of Rs. 816.48, giving Rs. 21,228.48, which is rounded to Rs. 21,230 and demanded in that form. The cess is never assessed, demanded or refunded on its own; it exists only inside the single figure of tax payable.

Effect on the top rate of tax

The cess raises the top rate of tax by rather more than four paise in the rupee, because it compounds on the surcharge as well as on the tax. In the old regime the highest slab rate of 30% carries a 37% surcharge and then the 4% cess, giving 30 multiplied by 1.37 and by 1.04, which is 42.744%. In the new regime the surcharge is capped at 25%, so the same arithmetic gives 30 multiplied by 1.25 and by 1.04, which is 39%.

Those two figures are the true top rates a resident individual faces, and the cess contributes 1.644 percentage points to the first and 1.5 to the second. Neither figure is the statutory maximum marginal rate.

The cess and the maximum marginal rate

Section 2(70) of the Income-tax Act 2025 defines the maximum marginal rate as “the rate of income-tax (including surcharge on income-tax) applicable in relation to the highest slab of income for an individual, association of persons or, as the case may be, body of individuals, as specified in the Finance Act of the relevant year”. The definition names the surcharge and stops there.

The cess is therefore charged on top of tax computed at the maximum marginal rate rather than forming part of that rate. The distinction has no effect on a salaried computation, where the tax is worked from the slabs in any event. It matters where a provision of the Act charges an amount at the maximum marginal rate directly, because the rate applied under such a provision is the pre-cess figure, with the cess added afterwards under Section 3(15) of the Finance Act 2026.

From 2% to 3% to 4%: the history of the levy

The 4% figure is the third rate in the series and the second name. The Finance (No. 2) Act 2004 created the first of the modern cesses on income tax, an “Education Cess on income-tax” at 2%, levied on income tax as increased by surcharge “so as to fulfil the commitment of the Government to provide and finance universalised quality basic education”.

The Finance Act 2007 added a second, separate levy alongside it. Section 2 of that Act imposed the “Secondary and Higher Education Cess on income-tax” at 1%, on the same base, “so as to fulfil the commitment of the Government to provide and finance secondary and higher education”. Chapter VI of the same Act set out the machinery, providing that the Central Government “may, after due appropriation made by Parliament by law in this behalf, utilise such sums of money” of the cess for those purposes. From that point the combined burden was 3%, though it was never a single 3% cess: it was a 2% cess and a 1% cess charged side by side, and returns and assessment orders of the period show them on separate lines.

The Finance Act 2018 discontinued both and replaced them with the single 4% Health and Education Cess on income-tax, widening the stated purpose from education alone to health services and education together, and raising the combined rate by one percentage point.

Why each change lands in the financial year, not the assessment year

All three changes took effect for a financial year rather than for an assessment year, and the Finance Act achieves that by a consistent drafting device that is worth understanding before comparing an old computation with a new one.

The First Schedule to every Finance Act is divided into Parts. Part I carries the rates for the assessment year just beginning, which taxes the income of the year just ended. Part II carries the rates for deduction at source, and Part III the rates for advance tax and for deduction from salary, both of which run through the financial year just beginning. When a cess is introduced or changed, the Act leaves the old rate running on the Part I charge and applies the new rate to the Part II and Part III charges.

The Finance (No. 2) Act 2004 applied its new 2% cess only to the sub-sections carrying the Part II and Part III cases, leaving the assessment year 2004-05 charge untouched. The Finance Act 2007 did the same with the 1% secondary and higher education cess. The Finance Act 2018 followed the identical pattern: the 2% and 1% cesses continued to be levied in all cases covered under Part I of the First Schedule, while for the financial year 2018-19 they were discontinued in the Part II and Part III cases and the new 4% cess levied in their place. The Finance Act 2018 also carried forward the resident carve-out, providing that no health and education cess would be levied on tax deducted or collected at source for a domestic company or a resident person, while stating expressly that the cess would apply on tax deducted at source on salary payments.

The result for a reader reconstructing an old figure is a clean rule. Income earned up to 31 March 2018 is assessed with the 3% education cess. Income earned from 1 April 2018 onwards is assessed with the 4% health and education cess. The same rule, one year earlier in each case, governs the 2004 and 2007 changes.

What the cess funds

The purpose is written into the levying provision rather than into a separate scheme. The Finance Act 2026 charges the cess “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”, which is the same formula the Finance Act 2018 used when it created the levy.

The money itself follows the ordinary route for a receipt of the Union. It goes to the Consolidated Fund of India, and it is spent on the stated purposes only after appropriation by Parliament, the mechanism the Finance Act 2007 spelled out in Chapter VI for the secondary and higher education cess. For an individual taxpayer the destination changes nothing about the computation. The cess is charged at 4% of the tax whatever the government spends it on, it is not hypothecated to any claim the taxpayer can make, and it is not refundable on the ground that a particular programme was or was not funded.

Why the cess cannot be reduced

Nothing reduces the cess except reducing the tax it is charged on, and that follows from its position rather than from any prohibition.

A deduction operates on income, so it reduces the tax and therefore the cess in the same proportion. An exemption keeps a receipt out of total income, with the same downstream effect. A rebate operates on the tax itself and, under Section 156 of the Income-tax Act 2025, is granted before the cess is charged, so it too shrinks the base. Relief for salary arrears under Section 89, which is Section 157 of the 2025 Act, works the same way.

What does not exist is any claim against the cess itself. There is no deduction from the cess, no separate rebate, no threshold below which it is waived, and no marginal relief. A taxpayer with Rs. 1 of tax pays 4 paise of cess. The chain of computation, running from income to deductions to tax to rebate to marginal relief to surcharge to cess, is the shape of every Indian tax computation, and the cess is always the last link.

The cess under the Income-tax Act 2025

The replacement of the Income-tax Act 1961 by the Income-tax Act 2025 with effect from 1 April 2026 leaves the cess untouched, for a structural reason. Rates, surcharge and cess have never been set by the Income-tax Act. They are set annually by the Finance Act, and the Finance Act 2026 does that job for both statutes at once.

Section 2 of the Finance Act 2026 charges income tax for the assessment year commencing on 1 April 2026 under the Income-tax Act 1961, at the rates in Part I-A of the First Schedule, with the 4% cess at Section 2(6). Section 3 charges income tax for the tax year commencing on 1 April 2026 under the Income-tax Act 2025, at the rates in Part I-B, with the 4% cess at Section 3(15) for the regular charge and Section 3(16) for deduction, collection and advance tax. The rate, the base and the purpose clause are identical in both.

What changes is only the section numbers a reader cites alongside the cess. The rebate moves from Section 87A to Section 156, the new regime from Section 115BAC to Section 202, deduction from salary from Section 192 to Section 392, and relief on arrears from Section 89 to Section 157. The 4% at the end of the computation is the same number reached the same way.

Related Articles

• New tax regime
• Old tax regime
• Old versus new tax regime
• Surcharge on income tax
• Section 87A rebate
• Marginal relief on income tax
• Section 115BAC and the default new regime
• Section 202 of the Income-tax Act 2025
• Income tax slabs for AY 2027-28
• Tax regime break-even: when the old regime wins
• Rebate, deduction, and exemption: the difference
• Standard deduction
• Deductions allowed in the new tax regime
• Form 10-IEA and opting out of the new regime
• How to switch tax regime
• Income-tax Act 2025
• Income tax for government employees
• Income tax for pensioners
• TDS on salary
• Form 16
• Form 26AS
• ITR-1 Sahaj
• Advance tax
• Self-assessment tax
• Capital gains tax
• Section 89 relief on salary arrears
• Central Board of Direct Taxes
• Income-tax calculator
• Take-home salary of central government employees
• Central government employees in India
• Dearness allowance
• House-rent allowance
• Leave encashment
• Family pension
• Gratuity for central government employees
• National Pension System

External references

• The Finance Act, 2026 (No. 4 of 2026), Gazette of India
• Union Budget of India: Finance Bills and budget documents
• Income Tax Department: Finance Acts
• Income Tax Department: e-filing portal
• Income Tax Department (about and Acts)
• Central Board of Direct Taxes
• Department of Revenue, Ministry of Finance

References

1. Finance Act, 2026 (No. 4 of 2026), assent 30 March 2026, Section 3(15) and Section 3(16): the Health and Education Cess on income-tax at 4% of income-tax and surcharge for the tax year commencing 1 April 2026 under the Income-tax Act, 2025.
2. Finance Act, 2026, Section 2(6): the same cess at 4% for the assessment year commencing 1 April 2026 under the Income-tax Act, 1961.
3. Finance Act, 2026, Section 3(17)(i): the cess disapplied to tax deducted or collected under the sections mentioned in sub-sections (7), (8) and (9) where the income is paid to a domestic company or any other person resident in India.
4. Finance Act, 2026, Section 3(10)(ii) and Section 3(10)(iv): deduction from income chargeable under the head “Salaries” under Section 392 of the Income-tax Act, 2025, and advance tax under Chapter XIX-C, charged at the Part III rates and therefore carrying the cess.
5. Finance Act, 2026, Section 3(5): marginal relief by the formula Tn = Rn + Sn, capping the total amount payable as income-tax and surcharge, with no mention of the cess.
6. Income-tax Act, 2025 (No. 30 of 2025), Section 156: the rebate granted from the income-tax computed before allowing the deduction under that section.
7. Income-tax Act, 2025, Section 15(2), Section 16(b) and Section 93(1)(d): pension chargeable under the head “Salaries” through the former employer, and the family pension deduction under income from other sources.
8. Income-tax Act, 2025, Section 403(3) and Section 516: the advance tax exemption for a resident individual aged 60 or more with no business income, and the rounding off of the amount payable or refundable to the nearest multiple of Rs. 10.
9. Income-tax Act, 2025, Section 2(70): the maximum marginal rate defined as the rate of income-tax including surcharge on income-tax applicable to the highest slab.
10. Finance (No. 2) Act, 2004, Section 2: the Education Cess on income-tax at 2% to finance universalised quality basic education.
11. Finance Act, 2007, Section 2 and Chapter VI: the Secondary and Higher Education Cess on income-tax at 1%, and the appropriation machinery for its proceeds.
12. Finance Act, 2018, Section 2, with the notes on clauses to the Finance Bill, 2018: the 2% and 1% cesses continued for Part I of the First Schedule and discontinued for Parts II and III, and the 4% Health and Education Cess levied in their place from the financial year 2018-19, with no levy on tax deducted or collected at source for a domestic company or a resident and an express levy on tax deducted at source on salary payments.