Possible to have nil income tax liability on crores of rupees of income? It's a reality in this Indian state
Is it possible to earn crores while paying zero tax? Sikkim is the only state in India that imposes no tax on high income earners. Curious to know how? Let’s understand the concept of earning crores but paying zero tax in Sikkim.
Sikkim is the only state in India that is tax exempted under section 10(26AAA) of the Income Tax Act. The Indo-Sikkim Treaty of 1950 allowed Sikkim to keep some independence while becoming part of India. This led to Sikkim officially joining India as its 22nd state in 1975. Article 371(F) of the Indian constitution grants Sikkim special status in several ways, one of them is tax free status.
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Why Sikkim is India’s Only tax free state?
Despite earning a large amount, people of Sikkim are exempted from paying taxes. Here is why. Sikkim merged with India in 1975, it maintained a tax free status to encourage development and attract investments. This unique tax-free status is protected under Article 371(F) of the Indian Constitution and Section 10(26AAA) of the Income Tax Act, 1961.
History behind Income tax exemption
Sikkim was an independent kingdom ruled by the Namgyal Dynasty. The kingdom's status changed significantly after Indian independence in 1947, leading to a treaty in 1950 that established Sikkim as an Indian protectorate while maintaining its internal autonomy. This agreement, known as the Indo-Sikkim Treaty of 1950, laid the groundwork for Sikkim's eventual merger with India.
Comparison to general income tax rules
Unlike most Indian states that impose income tax, Sikkim's tax-free status means residents do not pay state income tax, which can lead to higher disposable income. In other states, income tax rates can range from 5% to 30%, depending on income levels, affecting savings and spending.
Economic and financial impact of tax exemption
Attracting investment: Sikkim’s tax free status encourages investment and attracts high earners looking for tax benefits.
Tourism growth: It boost tourism, creating jobs and supporting local economy.
Entrepreneurship: The favourable tax environment encourages entrepreneurship, leading to new businesses and innovation.
Broader tax exemptions in India
Startups: Indian government offers tax exemptions for eligible startups, including three year income tax holiday and exemptions on capital gains.
Agricultural Income: Exempt to support farmers.
Partnership Firms: Taxed at the firm level, but partners receive post-tax profits.
Partnership firms
Partnership firms in India are taxed at a flat rate of 30% on their income, benefiting from no double taxation on profits distributed to partners.
Hindu undivided families
Hindu Undivided Families (HUF) are a distinct legal entity under Indian tax law, allowing members to be taxed as a single unit.
NRE accounts
NRE (Non-Resident External) accounts are foreign currency accounts that allow NRIs to deposit income earned outside India, offering tax-free interest and easy repatriation of funds.
Scholarships
Scholarships are often tax-exempt under Indian tax laws, meaning students do not have to pay tax on the amount received, making education more accessible.