Union Budget 2025: Do you know about the only tax-free state in India where residents earn crores without paying income tax?

Discover Sikkim, India’s only tax-free state, where residents enjoy complete income tax exemption under Article 371(F). Explore its financial benefits, historical significance and economic impact.  

ZeeBiz WebTeam | Feb 02, 2025, 12:51 PM IST

India's tax-free state: As Finance Minister Nirmala Sitharaman presented the Union Budget 2025 on February 1, marking her eighth consecutive budget, let’s take a closer look at Sikkim—India’s only tax-free state.

Thanks to Article 371(F) and Section 10(26AAA) of the Income Tax Act, Sikkimese residents enjoy complete income tax exemption, making it a rare financial privilege in India. This special status, granted during Sikkim’s 1975 merger with India, boosts disposable income and encourages investments. Unlike taxpayers in other states, Sikkimese citizens are exempt from income tax—regardless of earnings, even in crores. This unique tax benefit fuels economic growth, supporting key sectors like tourism, agriculture, and small businesses.

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India’s only tax-free state

India’s only tax-free state

Sikkim stands as India’s exclusive tax-free state, where residents are exempt from paying income tax, regardless of their earnings.

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Legal foundation of tax exemption

Legal foundation of tax exemption

The exemption is protected by Article 371 (F) of the Indian Constitution and Section 10 (26AAA) of the Income Tax Act, 1961, ensuring complete immunity from income tax.

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Who benefits?

Who benefits?

All individuals recognised as Sikkimese under the Sikkim Subjects Regulation, 1961, enjoy full tax exemption, including on interest and dividends.

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Income tax rules in India

Income tax rules in India

In contrast to the rest of India, where income tax applies based on earnings exceeding a threshold, Sikkim residents are not subject to these rules, even if their income reaches crores.

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Income Tax filing for residents

Income Tax filing for residents

While July 31 is the deadline for filing Income Tax Returns (ITR) nationwide, Sikkimese residents are exempt from this mandatory filing.

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Historical context

Historical context

Sikkim’s tax-free status originates from its merger with India in 1975, where the state retained certain privileges, including income tax immunity.

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Economic benefits of tax exemption

Economic benefits of tax exemption

With no income tax, residents enjoy higher disposable income, which promotes savings and investments, benefiting their financial well-being.

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Economic growth and investment

Economic growth and investment

The tax-free status attracts investments and stimulates economic growth, giving Sikkim a competitive edge over other Indian states.

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Impact on key sectors

Impact on key sectors

The exemption fosters growth in tourism, agriculture, and small businesses, positioning Sikkim as an attractive region for investment.

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Comparison with other exemptions in India

Comparison with other exemptions in India

Sikkim’s tax exemption is unique, while other exemptions in India include agricultural income, tax-free interest on NRE accounts, and scholarships.

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