This is the only tax-free state in India where residents earn in crores without paying income tax

As Finance Minister Nirmala Sitharaman presented the Union Budget 2025 on February 1, marking her eighth consecutive budget, one unique financial privilege in India stands out—Sikkim’s tax-free status.

Only tax-free state in India

Sikkim remains the only state in India where residents are completely exempt from paying income tax, irrespective of their earnings. This rare financial advantage is protected under Article 371(F) of the Indian Constitution and Section 10(26AAA) of the Income Tax Act, 1961.

Who benefits from the tax exemption?

All individuals officially recognised as Sikkimese under the Sikkim Subjects Regulation, 1961, are entitled to full tax exemption. This extends beyond salaries to include interest income and dividends, ensuring comprehensive relief from income tax.

What make Sikkim different from the rest state?

While income tax is mandatory for individuals across India exceeding a certain threshold, Sikkimese citizens enjoy complete tax immunity—even if their earnings run into crores. Furthermore, while the Income Tax Return (ITR) filing deadline for the rest of India is July 31, Sikkimese residents are not required to file ITRs.

Sikkim’s tax-free status: Historical context 

Sikkim was an independent kingdom before merging with India in 1975. As part of this merger agreement, the state retained certain privileges, including income tax exemption for its residents. This provision was put in place to protect the rights and economic interests of the Sikkimese people.

Economic benefits of tax exemption

With no income tax burden, Sikkimese residents have a higher disposable income, encouraging savings and investments. This financial advantage has led to:

• Increased investment chances in sectors such as tourism, agriculture and small businesses.
• A thriving local economy, as residents channel more funds into consumption and business ventures.
• A competitive edge over other states of India, as tax benefits attract investments into the region.

How Sikkim’s tax exemption compares to other tax-free incomes in India

While Sikkim’s income tax exemption is unique, India does provide certain tax-free incomes in specific cases, such as:

• Agricultural income, which remains tax-exempt nationwide.
• Tax-free interest on Non-Resident External (NRE) accounts.
• Scholarships, which are exempt from taxation.

Sikkim’s special tax-free status, a legacy of its historical merger with India, continues to benefit its residents, offering them financial security and economic growth opportunities. While other Indian states adhere to standard income tax regulations, Sikkim remains a unique exception, making it a fascinating case in India’s tax landscape.