Tax-Free State of Sikkim: Historical and Legal Factors

Sikkim state became tax-free during its merger with India in 1975, when it became the 22nd state of India.

The tax-free status is supported by Article 371F of the Indian Constitution which was introduced through the 36th Amendment Act, 1975. 

The state had its own income tax manual from 1948. But in 2008, the Union Budget introduced Section 10 (26AAA) of the Income Tax Act to provide income tax exemptions specifically for Sikkimese individuals.

Section 10(26AAA) of Income Tax Act, 1961

Section 10(26AAA) of Income Tax Act, 1961 grant exemption to :

• The entire individual whose name is recorded in the register maintained under the Sikkim Subject Rules, 1961 immediately before the day of 26th April 1975 i.e., a day before State of Sikkim merged with the Independent India.
• Further, the benefits of the exemption is also extended to those individuals whose name is recorded in the Register of Sikkim Subject by virtue of government of India Order no. 26030/36/90-ICI dated the 7th August 1990 and Order of even number dated the 8th April, 1991 and
• Also includes the person whose name is not recorded in the aforementioned register but it is established beyond doubt that the name of such individual's father or husband or paternal grandfather or brother from the same father has been recorded in that register.

Incomes exempted for Sikkim Person

Any Individuals being a Sikkimese (Residents of Sikkim) are exempted from paying income tax on earnings such as salary, business income, any source of income or by way of dividend or interest on securities.

Conditions Applicable 

• The individual must be a resident of Sikkim.
• The exemption applies only to the person who earned income within Sikkim, not outside the state.

Points To Note

If a Sikkimese woman marries a non-Sikkimese man can lose her tax exemption status. The Supreme Court upheld this condition in a 2008 ruling.