Only tax-free State in India: Even if one earns crores in a year here; Income Tax Department does not collect even single rupee

Income Tax Rule

• General Obligation: In India, individuals whose income falls under the taxable bracket are required to pay income tax.
• Exception: There exists a state in India where residents, even if they earn crores, do not have to pay income tax.

Income Tax Free State in India

• Filing Deadline: The last date for filing Income Tax Returns (ITR) in India is 31 July.
• Mandatory Filing: The Income Tax Act, 1961, mandates tax filing for eligible incomes.
• Exemption: Despite these rules, one state in India is exempt from paying any income tax.

The Tax-Free State

• Sikkim: Sikkim is the only state in India where residents do not pay income tax on their earnings.
• Constitutional Provision: Article 371(F) of the Indian Constitution excludes Sikkim's residents from the purview of income tax.

Historical Background

• Merger with India: In 1975, Sikkim merged with India.
• Condition of Merger: The merger was based on the condition that Sikkim would retain its old laws and special status.

 

Legal Framework

• Special Status: Sikkim enjoys special status under Article 371-F of the Indian Constitution.
• Income Tax Exemption: Native residents are exempted from income tax under Section 10(26AAA) of the Income Tax Act, 1961.

Section 10(26AAA) Explained

• Exemption Details: This section states that the income of any resident of Sikkim is outside the tax purview.
• Types of Income: This includes income from interest on securities and dividends.

Scope of Exemption

• Pre-Merger Residents: All individuals who were residents before Sikkim's merger with India are eligible for this exemption.
• Regulation Reference: Eligibility is determined by the Sikkim Subjects Regulations, 1961.

Implications

No Tax Liability: Sikkim residents do not have any income tax liability, regardless of their earnings.
Significant Relief: This exemption provides significant financial relief to Sikkim’s residents.

Broader Impact

• Economic Impact: The tax exemption can influence the economic activities and investments in Sikkim.
• Comparative Advantage: Sikkim has a unique advantage over other states due to this exemption.

 

Agricultural Income

• Exemption Basis: The Indian economy is primarily agricultural, and to support this sector, the government exempts agricultural income from tax.
• Includes: Growing, processing, and selling crops (e.g., wheat, rice, fruits). Rent from agricultural land or buildings.

Profit from Partnership Firm

• Taxation Level: The partnership firm’s income is taxed at the entity level.
• Partner's Share: Partners receive their share of profit after the firm’s tax.No additional income tax is required on the profit share received by the partners.

Individual Share from HUF

• Taxable Entity: HUF (Hindu Undivided Family) is taxed as an entity.
• Member's Share: After the HUF pays tax, the remaining earnings are distributed to its members. Members do not have to pay income tax on these distributions.

Interest Income from NRE Accounts

• Account Type: NRE (Non-Resident External) accounts are designed for NRIs who invest in India.
• Tax Exemption: Interest earned from NRE deposits is tax-free. Funds can be transferred from the NRE account to the account holder’s country of residence.

Scholarships

• Tax Exemption: Scholarships provided by government and private institutions are exempt from income tax.
• Note: The Income Tax Act does not impose taxes on such scholarships and rewards.

Key Takeaway

• Unique Status: Sikkim stands out as the only state in India where residents are entirely free from income tax obligations.
• Historical and Legal Reasons: This unique status is rooted in historical agreements and specific legal provisions.