Every tax season, a question surfaces among salaried professionals across India: is there a place in the country where you simply do not have to pay income tax? The answer is yes, and that place is Sikkim. But the exemption comes with a legal boundary that most people are unaware of. Moving to Sikkim does not make you tax-free. The benefit belongs to a specific group of people, defined by history and protected by law.
This article explains the legal foundation of Sikkim’s income tax exemption, which qualifies under Section 10(26AAA) of the Income Tax Act, 1961, what the Supreme Court has clarified on this subject, and what the law means for people who relocate to the state.
Historical Background
Before April 26, 1975, Sikkim was an independent kingdom ruled by the Namgyal dynasty, whose ruler held the title of Chogyal. It had its own laws, its own administration, and its own tax system. Residents of Sikkim were not subject to Indian income tax at all.
On April 26, 1975, the Constitution (Thirty-Sixth Amendment) Act, 1975 came into force, making Sikkim the 22nd state of India. At the time of this merger, the Government of India made specific commitments to preserve Sikkim’s existing laws and protections. These commitments were given constitutional backing through Article 371(F) of the Constitution of India.
To honour the tax-related commitment specifically, Section 10(26AAA) was inserted into the Income Tax Act, 1961 through the Finance Act, 2008, with retrospective effect from Assessment Year 1990-91.
What Section 10(26AAA) Says
Section 10(26AAA) exempts the following income from income tax for an eligible Sikkimese individual:
- Income from any source within the State of Sikkim, including salary, business income, professional income, and rental income earned in the state
- Income by way of dividend or interest on securities, if such income accrues or arises in Sikkim
The exemption is complete. There is no upper limit on the amount of income covered, as long as the income falls within the categories mentioned above and the individual qualifies as Sikkimese under the law.
Who Qualifies as Sikkimese
The term “Sikkimese” is defined in the Explanation to Section 10(26AAA). The following individuals qualify:
1. An individual whose name is recorded in the Register of Sikkim Subjects maintained under the Sikkim Subjects Regulation, 1961 read with the Sikkim Subject Rules, 1961, immediately before April 26, 1975
2. An individual whose name was included in the Register of Sikkim Subjects by virtue of Government of India Order No. 26030/36/90-I.C.I. dated August 7, 1990 and the Order of even number dated April 8, 1991
3. An individual whose name does not appear in the register, but where it is established beyond doubt that the name of their father, husband, paternal grandfather, or brother from the same father is recorded in that register
Supreme Court Ruling: January 2023
In the case of Association of Old Settlers of Sikkim and Others vs. Union of India, decided on January 13, 2023, the Supreme Court of India expanded the scope of Section 10(26AAA) in two important ways.
First, the Court held that all Indian nationals who had permanently settled in Sikkim before the merger on April 26, 1975, are entitled to the exemption under Section 10(26AAA), regardless of whether their names appear in the Register of Sikkim Subjects. These individuals, known as “Old Indian Settlers,” had been excluded from the original definition of Sikkimese because they had retained Indian citizenship before the merger, which had prevented their registration in the Sikkim Subjects register.
Second, the Court struck down the provision to Section 10(26AAA) which denied the exemption to a Sikkimese woman who married a non-Sikkimese man on or after April 1, 2008. The Court held that this restriction was discriminatory, violated Articles 14, 15, and 21 of the Constitution, and had no reasonable justification.
What Happens If You Relocate to Sikkim
This is the most important practical point, and the most widely misunderstood one.
Buying a property in Sikkim, shifting residence there for work, or spending years living in the state does not make a person eligible for the Section 10(26AAA) exemption. A salaried professional from Delhi, a consultant from Mumbai, or a business owner from Bengaluru who relocates to Sikkim will continue to file income tax returns and pay tax under the normal provisions applicable to all Indian residents.
The exemption is tied entirely to historical status and legal eligibility, not to current residence.
New Tax Regime and This Exemption
Eligible Sikkimese individuals should note one critical point regarding the new tax regime under Section 115BAC. Section 10(26AAA) is not available if you opt for the new tax regime. Under the new regime, most exemptions under Section 10 of the Income Tax Act are disallowed.
To claim the benefit under Section 10(26AAA), an eligible Sikkimese individual must file under the old tax regime.
Conclusion
Sikkim’s income tax exemption under Section 10(26AAA) is not a loophole or a policy incentive. It is a constitutional commitment made by the Government of India at the time Sikkim joined the Indian Union in 1975. The people of Sikkim were never liable to Indian income tax before the merger, and that protection was preserved through statute.
The Finance Act, 2008 gave this commitment statutory form, and the Supreme Court’s January 2023 ruling further expanded its reach to include Old Indian Settlers who had been unfairly excluded from the original definition. At the same time, the Court affirmed the longstanding principle that the exemption is tied to legal eligibility, not to physical residence.
For the vast majority of Indian taxpayers, Sikkim remains outside the scope of any income tax planning. For eligible Sikkimese individuals, the exemption continues to be a significant financial protection, provided they file under the old tax regime and declare the exempt income appropriately in their income tax return.
******
About the Author: Diksha Chawla is an MBA Finance professional with 7 years of experience in income tax education. She is the founder of finlecture.in, a personal finance and income tax education platform for salaried professionals and freelancers in India. She can be reached on dikshachawla4456@gmail.com.
Author Bio
