Impact of increase in health and education cess for FY 2018-19

Heath and Education cess is an additional levy on the basic tax liability. Governments resort to imposition of cess for meeting specific expenditure. In budget 2018, cess has been increased from 3% to 4%, which means extra burden on your pocket if you are a tax payer. If you are not a tax payer than there is noting to worry about. Your tax outgo will increase, as it is added on the tax payable by you after rebate. Below are some of the areas which are affected by the increase in cess.

Income Tax

Gross tax liability = Tax payable after rebate + Cess (4%)

I have illustrated it in the below table with different examples.

	Income Tax or Gross Tax Liability = Tax payable after rebate + Cess
Tax Payable After Rebate		Before		Now		Increase in Tax
		Cess (3%)	Total Income Tax	Cess (4%)	Total Income Tax
Rs 10,000		300	Rs 10,300	400	Rs 10,400	Rs 100
Rs 50,000		1500	Rs 51,500	2000	Rs 52,000	Rs 500
Rs 1,00,000		3000	Rs 1,03,000	4000	Rs 1,04,000	Rs 1000
Rs 5,00,000		15000	Rs 5,15,000	20000	Rs 5,20,000	Rs 5,000
Rs 10,00,000		30000	Rs 10,30,000	40000	Rs 10,40,000	Rs 10,000

Capital Gains Taxation

Long Term Capital Gains (Units of equity oriented funds held for more than 12 months and 36 months in case of other units)
	Before	Now
Equity Oriented Schemes	Nil	10% (without indexation)  + 10%/15% Surcharge  + 4% cess Total = 11.44 %/ 11.96%
Non - Equity Schemes	20% (with indexation)  + 10%/15% Surcharge*  + 3% cess Total = 22.66% / 23.69%	Increase in Tax due to increase in cess from 3% to 4% Total = 22.88 % / 23.92%

Meaning of * on Surcharge:

• No Surcharge if taxable income is less than 50 Lakhs.
• The surcharge at 10% is applicable where the total income paid or likely to be paid during the financial year exceeds Rs. 50 lakhs but less than R.s 1 crore. 
• Surcharge is 15% where the income or the aggregate of such income paid or likely to be paid during the financial year exceeds Rs. 1cr.
     

Dividend received by Unit holders

There is no change on the dividend received by the unit holder although there is increase in the Dividend Distribution Tax which means less dividend in the hands of unit holders.

Dividend - Individual/HUF
	Before	Now
Equity Oriented Schemes	Nil	Nil
Debt Oriented Schemes	Nil	Nil

Dividend Distribution Taxation (DDT) on Mutual Funds

When a mutual fund house pays dividend to its unit holders, there is a Dividend Distribution Tax (DDT) applicable on that dividend. AMC deducts this DDT from dividend and pays the rest of dividend to its unit holders. It means that although dividend received by the unit holder is tax free but AMC has already paid tax on that dividend.

Dividend Distribution Tax
	Before	Now
Equity Oriented Schemes	Nil	10% (without indexation)  + 12% Surcharge  + 4% cess Total = 11.648 %
Debt Oriented Schemes	25% (with indexation)  + 12% Surcharge  + 3% cess Total = 28.84%	Increase in Tax due to increase in cess from 3% to 4% Total = 29.14 %

As you can see that increase in cess will mean more tax to be paid by the tax payer.

Related Links - 
- Mutual Fund Taxation Rules for FY 2018-19
- Budget FY 2018-19 from 30,000 feet