As the deadline for filing income tax returns approaches, taxpayers across the country are in a flurry. People are gathering their documents, calculating their income, and preparing to file returns according to the tax slabs. But did you know that there is also a state in India where most people don't bother with this hassle because they don't need to file income tax?
This is India's Tax-Free State
Under the Income Tax Act, 1961 of the Government of India, every citizen of the country falls under the tax bracket, but Sikkim is a state that is exempt from it. The original residents of Sikkim are completely exempt from income tax under Section 10(26AAA) of the Income Tax Act.
Under this provision, the people of Sikkim have been exempted from tax on the ground that they became part of India under a special historical and constitutional agreement. As a result, people do not have to pay tax even if they earn millions of rupees here.
This Tax Exemption Facility is Linked to History
Sikkim's relationship with India is different from other states. The Namgyal dynasty was established in Sikkim in 1642, and this princely state remained independent for a long time. In 1950, a peace and security agreement was signed between India and Sikkim, under which Sikkim became a protectorate of India.
In this agreement, the citizens of Sikkim laid down several conditions to maintain their autonomy. A major condition was that India's tax laws would not apply to them. When Sikkim completely merged into India in 1975 and became the 22nd state, this condition remained in force.
'Sikkim Subjects Register' is the Proof of True Identity
Before becoming a part of India, a rule called 'Sikkim Subjects Regulation' was implemented in Sikkim to recognize citizenship, under which the 'Sikkim Subjects Register' was created in 1948.
Only those people whose names were recorded in this register or who are their descendants are considered true citizens of Sikkim and can avail the income tax exemption. This document is still the legal basis for Sikkim's tax-free status today.
Who Can Avail This Exemption?
This tax exemption is available only to those who are native to Sikkim and have a 'Sikkim Subject Certificate' or a related genealogy certificate.
This exemption also applies to those who had settled in Sikkim before 1975 and were later granted Indian citizenship under the Sikkim Citizenship Amendment Order, 1989. The Supreme Court has also clarified in its decisions that such citizens fall under the tax-free category.
This System Remains in Place Even in Modern India
Even though tax laws are amended from time to time in the rest of India, there has been no major amendment in the case of Sikkim so far.
Even in the budget speech of 2023 and 2024, Finance Minister Nirmala Sitharaman did not tamper with this section. This means that the tax-free status remains intact for the citizens of Sikkim even today.
Despite Being Tax-Free, They Do Big Business
The residents of Sikkim are working on a large scale in sectors like agriculture, tourism, hotel business, hydropower, education and medical. Many people even earn lakhs to crores, but despite this, they do not have to pay income tax because their name is included in that historical register.
95 Percent of the Population is Exempt from Tax Liability
Currently, about 95 percent of the population of Sikkim is completely exempt from income tax. The reason for this is that most people lived in Sikkim before 1975 or their ancestors were citizens of Sikkim.
The remaining category is only those people who have settled in Sikkim in later years, or who do not get this exemption because they do not have the necessary certificates.
Impact on Business and Investment Too
Due to this exemption, businessmen in Sikkim get a big tax benefit. Many investors are interested in opening businesses here, but this benefit is available only to local people.
People coming from outside have to pay tax, because the exemption of the Income Tax Act applies only to the original residents of Sikkim.
Tax Exemption, But Caution is Necessary in Banking and PAN Like Processes
The citizens of Sikkim have definitely got tax-free status, but when they use services like bank accounts, credit cards, investments or loans, they have to provide proof of this exemption. Sometimes technical difficulties also arise, because the digital system of the Income Tax Department does not have a separate provision for such exemptions.
