Unlike the rest of India, where income tax increases with income, Sikkim offers complete income tax exemption, regardless of earnings.
This tax-free status stems from a special provision under Article 371F of the Indian Constitution, a safeguard enshrined during the state’s merger in 1975. While the state might be small in size, its tax policy has the potential to attract high-net-worth individuals and businesses, especially those seeking to optimise their tax liabilities.
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However, experts caution that establishing residency and fulfilling other legal requirements is crucial to avail of this benefit. CA (Dr.) Suresh Surana, said, “Section 10(26AAA) of the IT Act provides for tax exemption to a Sikkimese individual on any income accruing or arising from any source in the State of Sikkim or by way of dividend or interest on securities. Prior to Finance Act 2023, Section 10(26AAA) of the IT Act did not grant exemption to a Sikkimese woman who married a non-Sikkimese person, nor to individuals domiciled in Sikkim whose names did not appear in the Register of Sikkim.”
“In the case of Association of Old Settlers of Sikkim v. Union of India [2023] 146 taxmann.com 271 (SC), the Supreme Court ruled that this provision was discriminatory and struck down the proviso to Section 10(26AAA) as unconstitutional, violating Articles 14, 15, and 21 of the Indian Constitution. To address this and incorporate the Supreme Court’s decision, the Finance Act 2023 has amended Section 10(26AAA) with retrospective effect from April 1, 1990, to redefine the term ‘Sikkimese’ (a native or inhabitant of Sikkim),” added Surana.