Sikkim's unique tax exemption: Why residents don't have to pay Income Tax

Before joining India, Sikkim had its own tax system and its residents were not subject to the Indian Income Tax Act.

Sikkim is exempt from income tax under Section 10 (26AAA) of the Indian Income Tax Act. The Northeastern state was given this assurance at the time of its merger with India in order to preserve its current tax structure. Before joining India, Sikkim had its own tax system and its residents were not subject to the Indian Income Tax Act. At the time, the Government of India granted Sikkim special exemptions from Income Tax.

Sikkim Tax Exemption Act: The exemption is codified in Section 10(26AAA) of the Income Tax Act. (Unsplash)

What is the Sikkim Income Tax exemption Act?

The exemption is codified in Section 10(26AAA) of the Income Tax Act, which states that any income earned or derived from any source in Sikkim or by anyone residing in the state through dividends or interest on securities is exempt from income tax. The people who are exempt include those who were residing in Sikkim before its merger with India.

What is the history of Sikkim Income Tax exemption Act?

In 2008, the Union Budget repealed the Sikkim Tax Act and exempted the state's residents from paying income tax via Section 10(26AAA) of the Income Tax Act. This preserves Sikkim's special status under Article 371(f).

In 2013, the Association of Old Settlers of Sikkim (AOSS) filed a petition against the exclusion of "old Indian settlers" who had settled in Sikkim before its 1975 merger with India. At the time, the Supreme Court ordered amendment of Section 10(26AAA) to include all Indian citizens residing in Sikkim up to April 26, 1975. This extended tax exemption to them as well.