Sikkim, a northeastern state in India, holds a unique position regarding income tax regulations. Unlike the rest of the country, residents of Sikkim are exempt from paying income tax on their earnings. This exemption is not a temporary measure but a long-standing legal privilege rooted in the Indian Constitution and supported by central tax law.

This distinct status is primarily due to Sikkim's historical context and its merger with India in 1975. At the time of the merger, the Indian government guaranteed that Sikkim's existing laws and privileges would remain undisturbed. This assurance included the continuation of Sikkim's own tax system, which predated its integration with India.

The legal basis for this exemption is found in Article 371(F) of the Indian Constitution and Section 10(26AAA) of the Income Tax Act, 1961. Article 371(F) grants special status to Sikkim, recognizing its unique circumstances and allowing for the preservation of its existing laws. Section 10(26AAA) of the Income Tax Act specifically exempts Sikkimese individuals from paying income tax on income earned within the state or through dividends and interest from securities.

The exemption applies to individuals who were recognized as Sikkimese subjects before April 26, 1975, their descendants, and those holding a Sikkim Subject Certificate. According to the Income Tax Act, if you qualify as a native of Sikkim and earn income within Sikkim, such as salary from a job, income from running a shop or company, house rent, or interest earned from investments, then you are exempt from paying tax.

This tax exemption means that Sikkimese residents can earn any amount of income without being subject to income tax. Whether an individual earns ₹5 lakh or ₹50 crore annually, they are not obligated to pay income tax. Moreover, unlike other Indian citizens who must file Income Tax Returns (ITR) if their income exceeds a certain threshold, Sikkimese residents are exempt from this requirement. The standard ITR deadline of July 31st, applicable across India, does not apply to Sikkimese residents, as they are not required to file returns at all.

Sikkim's tax-free status has several economic advantages for the state and its residents. The absence of income tax allows residents to retain a higher disposable income, leading to increased investment in tourism, agriculture, and small businesses. This, in turn, fosters a thriving local economy as individuals spend more within the state. The tax exemption also gives Sikkim a competitive edge over other Indian states in attracting investment.

In 2008, the Union Budget officially repealed the Sikkim Tax Act and introduced Section 10 (26AAA) of the Income Tax Act, further solidifying the income tax exemptions for residents of Sikkim.

The Supreme Court of India has also played a role in upholding Sikkim's tax-free status. In response to a petition, the Court ruled that the tax exemption under Section 10 (26AAA) should extend to all Sikkimese people, including those who settled in the state before its merger with India in 1975. The court also struck down the exclusion of Sikkimese women who married non-Sikkimese men after April 1, 2008.