BT EXPLAINER | Why Sikkim is exempt from income tax, which residents can claim exemption

As the 31 July deadline for filing income tax returns draws near, millions of taxpayers across the country are preparing to submit their returns. In this context, Sikkim stands out as a state where eligible local residents do not have to pay income tax. Whether their income is in lakhs or crores, they do not pay any tax to the government. Around 95% of the state's residents have a 100% exemption from income tax because of specific legal provisions.

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Sikkim as India's 'tax heaven'

Sikkim is also described as India's 'tax heaven.' It was not always a part of India and was earlier an independent monarchy known as the Kingdom of Sikkim. After a referendum in 1975, Sikkim became India's 22nd state. When it joined India, Article 371F was added to the Constitution to protect the rights of local people and the laws that were already in force there. Through this special provision, Sikkim was given certain legal and administrative protections so that the interests of its original residents and its traditional system could be safeguarded.

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Which law provides the tax exemption?

The income tax exemption in Sikkim is not recent and traces back to 1948. At that time, Sikkim's then ruler, the Chogyal, had put in place an income tax rule under which local people were not taxed. Later, when Sikkim became part of India in 1975, it was decided that this tax exemption for the state's original residents would continue. As part of that arrangement, Article 371F was included in the Constitution, and later eligible persons of Sikkimese origin were granted income tax exemption under Section 10(26AAA) of the Income-tax Act, 1961.

Who can claim the tax exemption?

However, not every person living in Sikkim gets this exemption. Initially, the exemption was available only to those who had a Sikkim Subject Certificate, or SSC, and they were treated as the state's original residents. Later, after a Supreme Court ruling, the scope of the exemption was widened. The court said that people of Indian origin who were permanently residing in Sikkim up to 26 April 1975, a day before Sikkim became part of India, would also be treated as original residents of the state. After this, nearly 95% of the state's population came within the scope of the income tax exemption.

If a person has moved to Sikkim from another state and does not fall in this category, the normal income tax rules that apply in the rest of the country will apply to that person as well. If required, such a person will also have to file an income tax return. This is not a new government scheme or a recently granted tax break, but part of the constitutional and legal arrangements made at the time of Sikkim's merger with India. That is why eligible local residents in Sikkim continue to receive this special exemption from income tax even today.