Surcharge and Health & Education Cess

What is Surcharge and Health & Education Cess?

Surcharge and Health & Education Cess are two separate top-up levies that sit on top of the basic income tax computed using the slab rates. Together they can add up to 41% on top of the basic tax for the highest earners under the old tax regime, and around 30% under the new regime — making them a meaningful component of the overall tax liability for senior salaried professionals, founders and high-net-worth individuals.

Surcharge is a percentage on the income tax amount, levied only when total income crosses defined thresholds. It is income-slab-driven and tiered. The Finance Act 2023 capped the maximum surcharge under the new tax regime at 25%, removing the 37% rate that continues to apply under the old regime.

Health and Education Cess is a flat 4% on the sum of income tax plus surcharge. It applies uniformly across all individual taxpayers and both tax regimes. The cess was introduced by the Finance Act 2018, consolidating the earlier 3% Education Cess and 1% Secondary and Higher Education Cess into a single 4% charge.

Eligibility criteria

Both surcharge and cess apply to all individual taxpayers and Hindu Undivided Families, regardless of whether they file under the old or new tax regime. The thresholds and rates differ slightly by regime as set out below. Surcharge is income-threshold-driven; cess is universal.

There is no exemption from cess. Even taxpayers with total income below ₹5 lakh (old regime) or ₹7 lakh (new regime) — who get full rebate under Section 87A — still technically have a 4% cess on the (zero) tax, which results in zero. The cess only becomes a real liability when there is positive tax after rebate.

Maximum deduction / formula

Surcharge slabs (FY 2025-26)

The 37% rate is the key difference. Under the old regime it continues to apply. Under the new regime it has been removed by the Finance Act 2023, capping the maximum surcharge at 25%.

Cess

Health and Education Cess: 4% flat on (income tax + surcharge). Applies under both regimes. No threshold, no exemption.

Capital gains and dividend exception

Under Section 112A (LTCG on listed equity), Section 112 (other LTCG), Section 111A (STCG on listed equity) and dividend income — the maximum surcharge is capped at 15% regardless of total income. This cap is independent of the slab-based surcharge applicable to other income.

Worked example

Consider Anil, a CXO with the following income for FY 2025-26 under the new tax regime:

• Salary income: ₹2,80,00,000

Step 1 — Income tax on slab basis (new regime FY 2025-26):

• Tax on ₹2,80,00,000 using new regime slabs: approximately ₹83,20,000 (after standard deduction)

Step 2 — Surcharge:

• Total income is ₹2,80,00,000, which falls in the ₹2-5 crore band.
• Surcharge rate: 25%
• Surcharge amount: ₹83,20,000 × 25% = ₹20,80,000

Step 3 — Cess:

• (Income tax + surcharge): ₹83,20,000 + ₹20,80,000 = ₹1,04,00,000
• Cess at 4%: ₹4,16,000

Step 4 — Total tax liability:

• ₹83,20,000 + ₹20,80,000 + ₹4,16,000 = ₹1,08,16,000

Effective tax rate: approximately 38.6% of total income.

For the same income under the old regime, the surcharge would still be 25% (since income is below ₹5 crore), so the totals would be similar. If Anil’s income were ₹6,00,00,000:

• Old regime: surcharge at 37% — effective tax rate around 42.7%
• New regime: surcharge capped at 25% — effective tax rate around 39%

This 3.7 percentage point gap is why the new regime is overwhelmingly favoured by very high earners.

Old regime vs new regime applicability

Both surcharge and cess apply under both regimes, with one structural difference:

The 25% surcharge cap is one of the headline features used to market the new regime to high earners. Combined with the lower base slab rates and the extension of the standard deduction to the new regime in FY 2023-24, the new regime has become the default choice for taxpayers above ₹5 crore.

Common mistakes

1. Forgetting marginal relief. Just above each surcharge threshold, marginal relief should kick in. Manual calculations often miss it, leading to overstated tax estimates.
2. Applying surcharge before cess. The order is fixed — cess is computed on (tax + surcharge), not on tax alone or on (tax + surcharge + cess).
3. Treating cess as part of slab tax. Some payroll TDS engines compute slab tax including cess and then re-apply cess. The result is double-counted cess.
4. Missing the 15% cap on capital gains surcharge. A taxpayer with ₹4 crore total income, of which ₹3 crore is LTCG, should have surcharge at 15% on the LTCG component, not 25%. Manual computation often misapplies the slab rate uniformly.
5. Ignoring the surcharge cap under new regime. Pre-FY 2023-24 templates still apply 37% above ₹5 crore under the new regime. Updated tax engines must enforce the 25% cap.
6. Surcharge rounding. Surcharge and cess are computed on the actual tax amount, not on rounded totals. Rounding too early can produce a small but notable mismatch with the assessing officer’s computation.

How Omnivoo helps

Omnivoo’s TDS engine implements the full slab-plus-surcharge-plus-cess pipeline for both old and new regimes, with marginal relief applied automatically at each surcharge threshold. The system enforces the 25% surcharge cap under the new regime from FY 2023-24, applies the 15% cap on capital gains and dividend surcharge separately, and handles regime-switch scenarios where part of the year was on one regime and part on another. Form 16 Part B reflects the surcharge and cess separately, in line with the prescribed format, so the figures reconcile cleanly with the employee’s ITR.

For a complete walkthrough of how monthly TDS is calculated on salary in India, see our TDS on salary guide.