India’s Sole Tax-Free State: Can You Guess Which One It Is?

As the July 31 deadline for filing Income Tax Returns (ITR) approaches, taxpayers across India are preparing to meet their obligations. However, one state in India stands out for its unique exemption from income tax: Sikkim. Residents of this state are not required to pay any income tax on their earnings, regardless of the amount they make. This exemption applies even if individuals earn millions annually, as the Income Tax Department cannot collect any tax from them.

Sikkim is the only state in India designated as a ITR Free State. This special status is granted under Article 372 (F) of the Indian Constitution, which exempts its residents from income tax. This arrangement dates back to 1975 when Sikkim merged with India. The merger came with the stipulation that Sikkim would retain its existing laws and special status, which was honored by the Indian government.

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The key provision for this tax exemption is Section 10 (26AAA) of the Income Tax Act of 1961. Under this section, any income earned by a resident of Sikkim, whether from interest on securities or dividends, is exempt from taxation. This exemption applies to individuals who had settled in Sikkim before its integration with India, regardless of their registration status under the Sikkim Subjects Regulations, 1961.

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Sikkim's unique tax status highlights the state's special provisions and its continued adherence to the terms agreed upon during its merger with India.