ITR FY25: Earn crores, pay 0 income tax; this is the only tax-free state in India!

India’s Only Tax-Free State: Sikkim

Sikkim is the only tax-free state in India where residents are not required to pay any income tax, even if they earn crores annually. This rare exemption gives Sikkim a unique position in the Indian tax system.

Income Tax Exemption Backed by the Constitution

Sikkim's income tax exemption is supported by Article 371(F) of the Indian Constitution and Section 10(26AAA) of the Income Tax Act, 1961. These provisions legally exclude Sikkim residents from the tax purview.

Historical Reason Behind Tax-Free Status

The 1975 merger of Sikkim with India came with a special condition—Sikkim would retain its previous laws and autonomous status, leading to permanent income tax relief for its native residents.

What Section 10(26AAA) of Income Tax Act Says

Section 10(26AAA) clearly mentions that income of Sikkimese residents—including income from securities and dividends—is exempt from taxation. This makes Sikkim residents legally untaxable under Indian income tax laws.

Eligibility: Who Qualifies for Income Tax Exemption in Sikkim?

Only pre-merger residents, as defined by the Sikkim Subjects Regulation, 1961, are eligible. This ensures that native Sikkimese individuals retain their tax-free status even today.

Legal Framework Supporting Income Tax-Free Sikkim

Sikkim’s special constitutional status under Article 371(F) ensures it remains outside the standard income tax network. This is a rare example of state-specific tax exemptions in India.

Implications of Sikkim’s Tax-Free Status

Sikkimese residents enjoy zero income tax liability, regardless of income level. This financial freedom offers significant economic relief and increases disposable income for individuals.

Economic and Investment Benefits in a Tax-Free State

The income tax exemption in Sikkim encourages higher savings, local investment, and entrepreneurial growth. Its unique tax-free environment makes it more attractive compared to other Indian states.

Other Types of Tax-Free Incomes in India

While Sikkim enjoys complete income tax exemption, India also excludes certain incomes from tax:

• Agricultural income
• Scholarships
• Interest from NRE accounts
• Partner’s share in partnership firms
• HUF distributions

These are governed by various clauses of the Income Tax Act.

Sikkim’s Unique Tax Identity

Sikkim remains the only Indian state with full income tax exemption for its residents. This rare and permanent tax status is a result of historical and constitutional protections, giving Sikkim a distinct economic identity within India.