The northeastern state of Sikkim is well-known for its stunning mountain landscapes and rich cultural heritage. However, it also has the unique distinction of being the only tax-free state in India!
For centuries, Sikkim was a Himalayan kingdom ruled by the Namgyal Dynasty. Following India’s independence in 1947, Sikkim was granted a special status, including tax exemptions for residents.
As per the Indo-Sikkim Treaty of 1950, Sikkim became an Indian protectorate with internal autonomy. It had its own tax system under which the residents were not subject to the Indian Income Tax Act.
In 1975, Sikkim became the 22nd state of India. However, the merger agreement between India and Sikkim continued the income tax exemption policy for the residents.
Budget 2008 introduced provisions under Section 10 (26AAA) of the Income Tax Act that exempt Sikkimese individuals from paying income tax as well as tax on dividends and interest on securities.
SEBI has also exempted Sikkim residents from the mandatory PAN requirement for investments in the Indian securities market and mutual funds.
However, this exemption only applies to individuals holding the Sikkim Subject Certificate or COI (Certificate of Identification). Other residents continue to pay taxes as per the prevailing income-tax laws.
Sikkim maintains strong fiscal discipline, relying on tourism, hydropower, and agriculture to boost state revenues and fund development projects despite being the only tax-free state in India.
Notably, the members of Scheduled Tribes in the states of Tripura, Mizoram, Manipur, Nagaland, Assam and Arunachal Pradesh are exempted from paying taxes.
Similarly, the tribes living in the Ladakh region and the Union Territory of Jammu and Kashmir don’t have to pay taxes.
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