The northeastern state of Sikkim is the only state in India where residents are exempt from paying income tax. Sikkim’s income tax exemption is based on the state’s merger treaty with India in 1975. It is protected by Article 371(F) of the Indian Constitution and Section 10(26AAA) of the Income Tax Act, 1961.
The income tax exemption was approved to maintain Sikkim’s existing tax system which was in place before it joined the Indian union. On May 16, 1975, Sikkim formally became the 22nd state of India after merging with the nation. Before joining the Indian Union, Sikkim was governed by the Chogyal Dynasty with its own tax system. The Sikkim Income Tax Manual of 1948 regulated Sikkim, according to which residents are exempt from paying any tax to the centre regardless of their income. After the merger, the Indian government agreed to preserve Sikkim’s existing tax laws, ensuring the citizens of Sikkim do not have to pay any tax to the centre.
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At the time of the merger, the Indian government guaranteed that Sikkim’s current laws and privileges would remain the same. This assurance was made to protect Sikkimese citizens from financial hardship as they were not required to pay any tax to the centre. This assurance was also made to maintain regional economic stability. Section 10(26AAA) was passed to make this exception lawful.
Any individual who has been a domicile of the state of Sikkim as of April 26, 1975 is exempted from paying taxes. This status is secured in Sikkim’s special status under Article 371(f) of the Indian constitution.
According to Section 10(26AAA), Sikkimese individuals are exempt from paying income tax on the following types of income:
* Any income generated within Sikkim, irrespective of the source (salary, business profits, rental income, etc).
* Any income from dividends or interest on securities if that arises or accrues in Sikkim.
The following qualify for this tax exemption:
* People who were recognised as Sikkimese subjects before April 26, 1975.
* The direct descendants of these individuals.
* Holders of Sikkim Subject Certificates.
Who does not qualify for this exemption?
The following do not qualify for this exemption:
* Rental incomes from properties outside Sikkim or any income that originates from sources outside of Sikkim.
* Sikkimese women who marry someone who is not a resident of the state after April 1, 2008.
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