India's Only Tax-Free State: Why Residents Get Income Tax Exemption?
All residents of Sikkim are exempt from income tax payment on their annual earnings.
It’s mandatory for all citizens in India to pay income tax when their earnings in a financial year exceed the limit fixed by the government. However, there is a state where the residents don’t need to pay taxes on their annual income.
It may sound surprising, but Sikkim is the only state where residents are exempt from paying income tax, regardless of their earnings. This second-smallest state by area enjoys a rare privilege due to its unique legal status and historical aspects.
Whether you earn Rs 5 lakh or Rs 50 crore in Sikkim, you are exempt from paying income tax. Let’s take details of this unique status of Sikkim.
Why Sikkim Enjoys Tax-Free Status
On May 16, 1975, Sikkim was formally merged with India to become the 22nd state of the nation. Prior to this, Sikkim existed as a separate monarchy under the Chogyal Dynasty, with its own legal system and taxation. The Sikkim Income Tax Manual of 1948 regulated the income tax in the kingdom.
In order to preserve Sikkim's unique legal status, the Indian government agreed to continue many of Sikkim's old laws, especially its tax laws, under the Indo-Sikkim Merger Agreement, which was finalised in December 1975. The government promised to protect the unique identity and rights of its people.
Article 371F of the Indian Constitution and Section 10 (26AAA) of the Income Tax Act, 1961, grant special status to Sikkim.
What is Section 10 (26AAA) of the Income Tax Act?
If you're a native of Sikkim and you earn income within Sikkim, such as salary from a job, income from running a shop or company, house rent, or interest earned from investments, then you are exempt from paying tax.
Tax Benefits For Sikkimese Residents
Individuals who qualify as Sikkimese residents are fully exempt from paying income tax on income earned within the state.
They are not required to provide PAN (Permanent Account Number) details while making investments in Indian securities and mutual funds.
Income earned through dividends, interests, and other sources within Sikkim is completely tax-free.
There is no limit on the earnings to get the tax exemption benefits. Even if a resident of Sikkim earns crores of rupees, there is no need to pay any income tax.
Who Qualifies As Sikkimese For Tax Exemption?
People whose names were recorded in the Register of Sikkim Subjects as on or before April 26, 1975.
Children and legal heirs of the original Sikkim Subject holder are also exempted from tax.
All those who have received an official Certificate of Identification (COI) from the Sikkim government.
Women who married Sikkimese men before April 26, 1975.\
Who Does Not Qualify?
Individuals who moved to Sikkim after 1975 and do not have ancestral ties to the original Sikkimese citizens.
People who earn income outside Sikkim. That income is taxable under regular Indian income tax laws, even if they are Sikkimese.
