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Sikkim No Income Tax System Explained for UPSC Exams

Sikkim No Income Tax System under Section 10(26AAA) of the Income Tax Act that exempts residents from paying tax. Learn about the unique Sikkim No Income Tax System here.
authorImageDeeksha Dixit2 Aug, 2024
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Sikkim No Income Tax System

Sikkim No Income Tax System: The deadline of July 31st to file the tax return must have kept you on your toes, but do you know there is a state in India that enjoys income tax exemption? Sikkim, a small state in northeastern India, is unique due to its tax-free status. Sikkim benefits from a special tax exemption status, often referred to as the "Sikkim No Income Tax System."

This exemption is rooted in Article 371(F) of the Indian Constitution and Section 10(26AAA) of the Income Tax Act, 1961, allowing its residents to avoid income tax obligations. Read on to find out the reasons behind Sikkim No Income Tax System, and the legal framework that supports it.

What is an Income Tax Exemption?

Income tax exemption is a provision that allows individuals or entities to be exempt from paying income tax on a portion or all of their income. To simplify, if your income is above Rs 10 lakh, you are supposed to pay a certain amount of tax on it. But if you are exempted under any legal provision, then you are not obliged to pay tax to the government. This exemption can be based on various factors, such as the source of income, the nature of the individual or entity, or specific government policies. In the case of Sikkim, this exemption is due to provisions of special status under Article 371(F) and Section 10(26AAA) of the IT Act and applies to all residents of the state, regardless of their income level.

Sikkim: The Income Tax Free State in India

Sikkim is the only state in India where residents enjoy tax-free status regardless of their earnings. There is zero income tax in Sikkim and this exemption extends to securities, dividends, and other sources, as well as the mandatory PAN requirement by SEBI. Sikkim No Income Tax System means that Sikkimese individuals are not required to pay income tax on their earnings within the state or on dividends and interest from securities. Sikkim No Income Tax System applies to legal residents of the state.
The ‘ Section 10(26AAA) in The Income Tax Act, 1961’ grants tax exemptions to Sikkimese residents on all forms of income, including earnings from interest, dividends, and other sources and also defines a "Sikkimese". It states: In case of an individual, being a Sikkimese, any income which accrues or arises to him—
  • from any source in the State of Sikkim; or
  • by way of dividend or interest on securities:
Provided that nothing contained in this clause shall apply to a Sikkimese woman who, on or after the 1st day of April, 2008, marries an individual who is not a Sikkimese.

Background of Sikkim No Income Tax System

Sikkim's journey to becoming a tax-free state is rooted in its history of mergers with India. Before its merger with India in 1975, Sikkim was an independent kingdom under the Namgyal dynasty. In 1975, Sikkim became the 22nd state of India through a referendum, with unique terms including its Sikkim No Income Tax System, supported by Article 371F of the Indian Constitution.
Background of Sikkim No Income Tax System
Event Year Description
Indo-Sikkim Treaty 1950 Established Sikkim as an Indian protectorate while maintaining its internal autonomy.
Merger with India 1975 Following a referendum, Sikkim became the 22nd state of India, with merger terms including the preservation of its existing laws and special status under Article 371F.
Introduction of Section 10(26AAA) 2008 The Union Budget repealed the Sikkim Tax Act and introduced Section 10(26AAA) of the Income Tax Act, exempting Sikkimese residents from paying income tax on earnings from sources within Sikkim.
Supreme Court Ruling 2023 The Supreme Court ruled that the exclusion of certain groups from tax exemption under Section 10(26AAA) was unconstitutional and directed amendments to include all Indian citizens domiciled in Sikkim as of April 26, 1975, extending the exemption.

Eligibility and Benefits of Sikkim Income Tax Rules

The eligibility for the unique tax exemption in Sikkim is determined by the provisions of Section 10(26AAA) of the Income Tax Act and the Sikkim Subjects Regulations, 1961. The Sikkim No Income Tax System applies to:
  • Residents of Sikkim: Individuals must be residents of Sikkim as per the rules of  Sikkim Subjects Regulations, 1961 to qualify for the tax exemption.
  • Income Source: The exemption applies solely to income generated within Sikkim. Income derived from external sources does not qualify for this exemption.
The Sikkim No Income Tax System not only preserves the historical and cultural identity of the state but also provides significant benefits to its residents. Some of these advantages are:
  • No Income Tax Liability: Residents of Sikkim are exempt from paying income tax on their earnings, including salaries, business income, and other forms of income.
  • Investment Advantages: This exemption makes Sikkim an attractive location for investments from business houses.
  • Economic Incentives: The tax-free status encourages economic activity and attracts individuals and businesses, contributing to the state's development.
  • Social Benefits : The exemption enhances the financial well-being of residents of this small state, allowing them to stay and work in Sikkim without the burden of income tax.

Other Tax Exempted States

While Sikkim is the only state in India that offers a Sikkim No Income Tax System to its residents, other states enjoy certain tax exemptions or concessions under Section 10(26) of the Income Tax Act. Section 10(26) grants exemption to scheduled tribes living in Tripura, Mizoram, Manipur, Arunachal Pradesh, Nagaland, Assam, and the Ladakh region. Learn about the special status granted to Indian states under the Constitution. Enroll now in the top UPSC courses by Physics Wallah and scale up your preparation!
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Sikkim No Income Tax System FAQs

Which state has no income tax in India?

Sikkim is the only state in India where residents enjoy income tax exemption.

What is the tax system in Sikkim?

Sikkim residents are exempt from paying income tax on earnings within the state due to Section 10(26AAA) of the Income Tax Act and Article 371(F) of Constitution.

Which act allowed Sikkim No Income Tax System?

Section 10(26AAA) of the Income Tax Act, 1961, allows the Sikkim No Income Tax System.

Which states are exempted from income tax in India?

Residents of Sikkim are fully exempt, while certain scheduled tribes in Tripura, Mizoram, Manipur, Arunachal Pradesh, Nagaland, Assam, and Ladakh enjoy partial exemptions under Section 10(26).

What is the eligibility for tax exemption in Sikkim?

To be eligible, individuals must be residents of Sikkim and have income generated within the state.
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