Residents of Sikkim have a unique advantage that sets them apart from the rest of India. Unlike other states, Sikkim is exempt from income tax under Section 10 (26AAA) of the Indian Income Tax Act.

Why Doesn’t Sikkim Have to Pay Income Tax?

When Sikkim merged with India, the government assured the state that it could keep its existing tax system. Before joining India, Sikkim had its own tax rules and residents didn’t have to pay Indian income tax. To honour this, the Government of India granted Sikkim special exemptions from Income Tax.

What is the Income Tax Exemption for Residents of Sikkim?

The Sikkim Income Tax exemption is explained in Section 10(26AAA) of the Income Tax Act. It states that any income earned in Sikkim or by Sikkim residents from sources like dividends or interest on securities is exempt from income tax. This exemption applies to people who lived in Sikkim before it became part of India.

History of the Sikkim Income Tax Exemption

The Union Budget replaced the Sikkim Tax Act in 2008 and instead granted income tax exemptions to Sikkim’s residents through Section 10 (26AAA) of the Income Tax Act. This change helps maintain Sikkim’s unique status under Article 371(f).

In 2013, the Association of Old Settlers of Sikkim (AOSS) filed a petition because “old Indian settlers” who had moved to Sikkim before it joined India in 1975 were not included in the tax exemptions. The Supreme Court then ordered an update to Section 10(26AAA) to include all Indian citizens living in Sikkim until April 26, 1975 which granted them tax exemptions as well.