Certain provisions of the Income Tax Act, 1961 provide protection from income tax liability for inhabitants of some states.
Section 10(26)
Members of Scheduled Tribes living in specific areas as defined in the Constitution or in certain states (Arunachal Pradesh, Manipur, Mizoram, Nagaland, and Tripura) or in specific areas covered by a notification issued by the Governor of Assam, or in the Ladakh region of the State of Jammu and Kashmir, are exempt from paying income tax on any income earned by them from any source in those areas or by way of dividend or interest on securities, as per Section 10(26) of the Income Tax Act.
Section 10(26A)
Any income earned by a person who is a resident in the Ladakh district, from any source within the district or outside India, in any assessment year before April 1, 1989, is exempt from income tax. This exemption applies only if the person was a resident in the Ladakh district in the previous year relevant to the assessment year starting on April 1, 1962, according to Section 10(26A) of the Income Tax Act.
A person will be considered a resident of Ladakh if they meet the residency requirements specified in sub-sections (1) to (4) of Section 6 of the Income Tax Act, with the modification that references to India should be interpreted as referring to the Ladakh district.
The “Ladakh district” also refers to the areas that were included in it on June 30, 1979.
Section 10(26AAA)
In case of an individual, being a Sikkimese, any income which accrues or arises to him—
(a) from any source in the State of Sikkim; or
(b) by way of dividend or interest on securities, is exempt from the total income, availing him the exemption from paying income tax on such income.
However, this clause does not apply to a Sikkimese woman who, on or after the 1st day of April,
2008, marries an individual who is not a Sikkimese.
But, In a ruling in [Association of Old Settlers of Sikkim and Ors vs Union of India and Anr – 2023 TAXSCAN (SC) 107]
striking down a part of section 10(26AAA) of Income Tax Act, 1961, the Supreme Court had recently held that denial of income tax exemption for “married Sikkimees women” is discriminatory as the provision states that the benefit shall be given to all individuals including both men and women.
Also, for the purposes of this clause, “Sikkimese” means—
(i) An individual whose name is recorded in the Register of Sikkim Subjects, which is maintained under the Sikkim Subjects Regulation, 1961 read with the Sikkim Subject Rules, 1961, immediately before the 26th day of April, 1975.
(ii) An individual whose name is included in the Register of Sikkim Subjects by virtue of the Government of India Order No. 26030/36/90-I.C.I., dated the 7th August, 1990 and Order of even number dated the 8th April, 1991.
(iii) Any other individual whose name does not appear in the Register of Sikkim Subjects, but it is established beyond doubt that the name of such individual’s father, husband, paternal grandfather, or brother from the same father has been recorded in that register.
In short, this section provides an income tax exemption for individuals who are Sikkimese and whose income is earned in Sikkim or by way of dividends or interest on securities. The term “Sikkimese” includes individuals whose names appear in the Register of Sikkim Subjects or who can establish a connection to someone whose name appears in that register.
Notably, the state follows the Sikkim Income Tax Manual, 1948. The residents of Sikkim do not have to pay taxes to the Centre, as per the manual. The market regulator SEBI had also exempted the Sikkim residents from having the mandate of having a PAN number for investments.
Permanent Account Number (PAN) was introduced to facilitates linking of various documents, including payment of taxes, assessment, tax demand, tax arrears etc. relating to an assessee, to facilitate easy retrieval of information and to facilitate matching of information relating to investment, raising of loans and other business activities of taxpayers collected through various sources, both internal as well as external, for detecting and combating tax evasion and widening of tax base.
Here, since the income tax exemption applies to the said individuals whose income is exempt from the total taxable income, the taxable income of such individuals fall under the minimum tax liability limit. Such individuals will not have to file Income Tax Returns. Resultantly, they are also not required to hold a PAN Card.
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