Did you know about the only Indian state exempt from paying any income tax? Know all about it here

With Indians rushing to file their ITRs ahead of the July 31st deadline that's coming up tomorrow, did you know that residents of just one Indian state are exempt from filing income tax returns, or paying taxes at all? Yes, Sikkim is the only state in the country where the residents do not have to pay income tax. But why is that the case? Let's delve into it.

An erstwhile princely kingdom for almost 333 years prior to its amalgamation, Sikkim merged into independent India in 1975, thereby becoming the country's 22nd state. But this happened on one condition- that it will be allowed to continue with its old tax laws post the merger.

Sikkim has its own income tax manual, which stipulated that no resident of Sikkim was to pay taxes to the center. Hence, honoring the merger agreement, the Indian government granted a special tax exemption to Sikkimese residents from Indian income tax regulations.

This changed in 2008, when the Union budget repealed the state's tax laws. However, to maintain the exemption status enjoyed by the state's residents, it inserted section 10 (26AAA). Under this section, any income generated by a Sikkimese, be it from a source within the state, or by way of dividend or interest on securities, would be tax-exempt.

At present, any individual who has been domiciled (noted as having fixed, principal and permanent residence) in Sikkim as of April 26, 1975 would be considered a Sikkimese, and hence, exempt from paying income tax. As per data from PRS Legislative Research, the state's estimated own tax revenue for 2023-24 stood at Rs 1,727 crore.

However, if a Sikkimese has rental income from properties situated outside of the state, or has an income from source that is not located in Sikkim, it will be subject to relevant taxes.

Nevertheless, the provisions of tax exemptions would not apply to any Sikkimese woman, who marries a non-Sikkimese or an outsider, on or after April 1, 2008. Market regulator SEBI has also exempted residents of Sikkim from mandatorily having a PAN card for investing in Indian stock markets, equities, cash market and even mutual funds.

Decoding Section 10 (26) of the IT Act

All these income-tax exemptions also extend to a few other regions in the country, but only if you are a member of the scheduled tribes. Section 10(26) of the Income Tax Act applies to Ladakh, Arunachal Pradesh, Manipur, Mizoram, Nagaland and Tripura, along with the North Cashar hills district, Karbi Anglang district, Chakma district, Mara district, and Lai District.

Simply put, it stipulates that if you belong to the scheduled tribes and generate any income, the source of which lies in the above mentioned regions, or by way of dividend or interest on securities, your income would be tax-exempt. But any income generated outside of these regions would be taxable.