As Finance Minister Nirmala Sitharaman gears up to present the Union Budget 2025 on Saturday, February 1, which will be her eighth consecutive budget, let’s take a closer look at Sikkim, the only tax-free state in India. Thanks to Article 371(F) and Section 10(26AAA) of the Income Tax Act, residents of Sikkim are completely exempt from income tax. This special status was granted during Sikkim’s merger with India in 1975, allowing for increased disposable income and attracting investments. Unlike other states in India, people in Sikkim do not pay income tax, even on earnings in the crores. This tax-free environment significantly contributes to Sikkim’s economic growth, positively impacting tourism, agriculture, and small businesses.

Sikkim, a small yet remarkable state in India, holds the unique distinction of being the country’s only tax-free state. Residents of Sikkim are exempt from paying income tax, regardless of their earnings, which sets them apart from the rest of the nation. This exemption is safeguarded by Article 371 (F) of the Indian Constitution and Section 10 (26AAA) of the Income Tax Act ensuring that all individuals recognized as Sikkimese under the Sikkim Subjects Regulation, 1961, enjoy complete immunity from income tax, including on interest and dividends.

In most of India, income tax is levied on individuals whose earnings exceed a certain threshold, but Sikkimese residents are not bound by these regulations, even if their income reaches crores. This tax-free status not only alleviates the financial burden on individuals but also eliminates the need for them to file Income Tax Returns (ITR) by the nationwide deadline of July 31.

The origins of Sikkim’s tax-free status date back to its merger with India in 1975, during which the state retained specific privileges, including immunity from income tax. This unique advantage allows residents to enjoy a higher disposable income, fostering greater savings and investments that contribute positively to their financial health.

The tax exemption in Sikkim encourages growth in tourism, agriculture, and small businesses, making it an appealing area for investment. While Sikkim’s exemption is distinct, other tax exemptions in India include those for agricultural income, tax-free interest on Non-Resident External (NRE) accounts, and scholarships. The increased disposable income among residents has a ripple effect, benefiting local businesses, enhancing tourism, and promoting agricultural development. As Sikkim continues to thrive as a tax-free haven, it showcases the potential for economic prosperity through innovative fiscal policies that prioritize the welfare of its citizens.