PAN Inoperative After 31st December 2025?

PAN Inoperative After 31st December 2025? 

By CA Anant Lall Gupta

Here's What You Need to Know

The Confusion:

Panic has gripped many taxpayers with widespread misinformation about PAN cancellation. People are rushing to tax offices, questioning whether they need to apply for new PANs, and fearing loss of their financial identity.

The Facts:

Let me clear this up: Your PAN is NOT cancelled—it becomes inoperative. This is a temporary status, not a permanent deletion. You absolutely do NOT need to apply for a new PAN card.

Problems with Inoperative PAN:

• Cannot file Income Tax Returns

• Tax refunds will be blocked

• High-value financial transactions get rejected

• TDS deducted at higher rates (20% instead of applicable slab rates)

The Solution:

Fixing this is straightforward:

Pay ₹1,000 late fee/penalty

Submit PAN-Aadhaar linkage request online at incometax.gov.in

Wait 48 hours for system processing

Your PAN automatically becomes operative again.

Conclusion:

Don't panic or waste time applying for new PANs. Simply link your existing PAN with Aadhaar, pay the penalty, and resume normal operations within 48 hours.

#IncomeTax #PAN #Aadhaar #TaxCompliance #FinancialPlanning #Charteredaccountant #CA #Gangtok #Sikkim

Sec 194N/194NF of Income Tax Act, 1961.- By CA Anant Lall Gupta

 Understanding TDS Deducted Under Section 194N of the Income Tax Act

A Guide for the Sikkimese Community on Cash Withdrawal Tax

-CA Anant Lall Gupta.

What is Section 194N?

Section 194N(mostly shown as 194NF by State Bank of Sikkim and other banks under 26 AS) of the Income Tax Act requires banks and post offices to deduct Tax Deducted at Source (TDS) on cash withdrawals exceeding specified limits. Many members of the Sikkimese community have been affected by this provision and may be eligible for refunds.

When is TDS Deducted Under Section 194N?

TDS is deducted when cash withdrawals from bank accounts exceed Rs. 20 lakh in a financial year for taxpayers who have filed income tax returns for all three preceding assessment years.

For those who have not filed returns for all three preceding years, TDS applies when cash withdrawals exceed Rs. 1 crore in a financial year.

The TDS rate is 2% of the amount exceeding the threshold limit.

For non-PAN or invalid PAN cases, the TDS rate increases to 5%.

Impact on the Sikkimese Community

Many Sikkimese individuals, particularly those dealing in cash-intensive businesses or agricultural income, have experienced TDS deductions on their legitimate cash withdrawals.

The deduction often occurs even when the total income is below the taxable limit or when income is exempt under special provisions.

This has created financial hardship and confusion within the community, especially for those unfamiliar with income tax procedures.

How to Claim Your TDS Refund

Step 1: Determine Which ITR Form to File

ITR-2: File this form if you are an individual or Hindu Undivided Family (HUF) with income from salary, house property, capital gains, or other sources (but not business or profession income).

ITR-3: File this form if you have income from business or profession, along with income from other sources like salary, house property, or capital gains.

Step 2: Gather Required Documents

Form 26AS or Annual Information Statement (AIS) showing TDS deducted under Section 194N

Bank statements showing cash withdrawals

PAN card

Aadhaar card

Income proof documents (salary slips, agricultural income records, business books, etc.)

Step 3: File Your Income Tax Return

Calculate your total taxable income for the financial year.

Include all sources of income and claim applicable deductions.

The TDS deducted will be reflected in Form 26AS and can be claimed as tax credit.

If your total tax liability is less than the TDS deducted, you will receive a refund.

Important Deadlines for Belated Returns

For Assessment Year 2024-25 (Financial Year 2023-24):

Original deadline for filing: July 31, 2024 (already passed)

Last date for filing belated returns: December 31, 2024

Penalty for belated filing: Up to Rs. 5,000 (Rs. 1,000 if total income is below Rs. 5 lakh)

For Assessment Year 2025-26 (Financial Year 2024-25):

Original deadline: July 31, 2025

Last date for filing belated returns: December 31, 2025

Critical Point: You can file belated returns up to December 31 of the relevant assessment year to claim your TDS refund. Missing this deadline means losing your refund permanently.

Special Considerations for the Sikkimese Community

If your primary income is from agriculture, it is generally exempt from income tax, but you must still file a return to claim TDS refunds.

Small business owners and traders should maintain proper books of accounts to support their income declarations.

Senior citizens (60 years and above) have higher basic exemption limits and may be eligible for full refunds.

If you have income below the basic exemption limit (Rs. 2.5 lakh for individuals below 60 years), you can claim a complete refund of TDS deducted.

Steps to Avoid Future TDS Deductions

File your income tax returns regularly for all financial years, even if your income is below the taxable limit.

Maintain proper documentation of income sources, especially for exempt income.

Submit Form 15G (for individuals below 60) or Form 15H (for senior citizens above 60) to your bank if your total income is below the taxable limit.

Plan your cash withdrawals strategically to stay within the threshold limits where possible.

How to Check Your TDS Status

Log in to the Income Tax e-filing portal (www.incometax.gov.in)

Navigate to "View Form 26AS" or "Annual Information Statement (AIS)"

Check for TDS deductions under Section 194N

Verify the amount deducted and the bank's TAN (Tax Deduction Account Number)

Getting Help

If you need assistance with filing returns or claiming refunds:

Contact a local Chartered Accountant or tax consultant familiar with Sikkimese community needs

Visit the nearest Income Tax Help Center or Aaykar Seva Kendra

Call the Income Tax Department helpline: 1800-180-1961

Use the e-filing portal's chatbot for guidance

Key Takeaways

TDS under Section 194N is deducted on cash withdrawals exceeding Rs. 20 lakh or Rs. 1 crore depending on your filing history.

You can claim a full refund if your actual tax liability is lower than the TDS deducted.

File ITR-2 if you have no business income; file ITR-3 if you have business or professional income.

The last date to file belated returns and claim refunds is December 31 of the assessment year.

Don't let your hard-earned money remain with the tax department—file your return before the deadline to claim what's rightfully yours.

Disclaimer: This article provides general information and should not be considered professional tax advice. For specific guidance related to your individual circumstances, please consult a qualified tax professional or Chartered Accountant.

NON-APPLICABILITY OF COMPANIES ACT, 2013 IN SIKKIM: A CRITICAL ANALYSIS UNDER ARTICLE 371F- BY CA ANANT LALL GUPTA

 

 NON-APPLICABILITY OF COMPANIES ACT, 2013 IN SIKKIM: A CRITICAL ANALYSIS UNDER ARTICLE 371F

By CA ANANT LALL GUPTA, GANGTOK, SIKKIM.

INTRODUCTION

The Ministry of Corporate Affairs confirmed in a recent Rajya Sabha response that the Companies Act, 2013, does not apply to Sikkim, creating a unique regulatory vacuum in India's corporate landscape. This constitutional anomaly stems from Article 371F of the Indian Constitution, which grants special provisions to Sikkim following its merger with India in 1975. While Section 465 of the Companies Act, 2013 provides for the repeal of the Registration of Companies (Sikkim) Act, 1961, this repeal has not been implemented due to a 2013 commitment by the Corporate Affairs Minister to consult the Sikkim government before applying the new law. Despite multiple communications from the Ministry seeking consent, the Sikkim government has yet to respond, leaving businesses in the state operating under a sixty-four-year-old legal framework designed for an entirely different economic era.

UNDERSTANDING ARTICLE 371F AND ITS IMPLICATIONS

Article 371F provides special constitutional provisions for Sikkim's integration into India, including protections for Sikkimese people's rights, special legislative powers for the Governor, and constitutional safeguards to preserve the state's distinct identity and cultural heritage. Clause (k) of Article 371F specifically states that all laws in force immediately before the appointed day (May 16, 1975) in the territories of Sikkim shall continue to be in force, which forms the constitutional basis for maintaining the Sikkim Registration of Companies Act, 1961.

This special status also exempts Sikkim residents from income tax under Section 10(26AAA) of the Income Tax Act for income earned within the state, demonstrating the comprehensive nature of constitutional protections afforded to Sikkim. However, this protection has created an unintended consequence in corporate regulation, where the state exists in a legal twilight zone between outdated legislation and modern corporate governance requirements.

NEGATIVE IMPACTS: WHAT SIKKIM IS LOSING

1. Regulatory Vacuum and Legal Uncertainty

Civil society organizations have raised concerns that Sikkim lacks proper laws to regulate private companies, creating a situation where the state ceased implementing the 1961 Act while the Companies Act, 2013 has not been notified. This regulatory vacuum has several detrimental consequences:

Investor Confidence: Modern investors, venture capitalists, and financial institutions are familiar with the Companies Act, 2013 framework. The absence of this standardized regulatory environment deters investment and makes Sikkim-based companies less attractive for funding.

Inter-State Business Complications: Companies registered under the Sikkim Act face difficulties conducting business in other states, as their legal status may not be readily recognized under the national framework, creating operational barriers and compliance challenges.

Limited Access to Digital Infrastructure: The MCA21 portal and associated digital filing systems are not available to Sikkim companies, forcing them to rely on manual, paper-based processes that are time-consuming, inefficient, and prone to delays.

2. Startup and Entrepreneurship Disadvantages

The modern startup ecosystem thrives on specific corporate structures like One Person Companies (OPC), which were introduced in the Companies Act, 2013. Sikkim entrepreneurs cannot legally establish OPCs or benefit from other progressive corporate structures that facilitate solo entrepreneurship and small business formation. This places Sikkim's aspiring entrepreneurs at a significant disadvantage compared to their counterparts in other Indian states.

Additionally, startup India initiatives, government schemes for MSMEs, and various entrepreneurship support programs are designed around the Companies Act, 2013 framework. Sikkim-based businesses may find themselves excluded or facing additional bureaucratic hurdles when accessing these benefits.

3. Corporate Governance and Compliance Standards

The Companies Act, 2013 introduced significant improvements in corporate governance, including:

• Enhanced transparency and disclosure requirements
• Stronger minority shareholder protection mechanisms
• Modern audit and accountability frameworks
• Related party transaction regulations
• Corporate Social Responsibility (CSR) mandates
• Independent director requirements

Sikkim companies operating under the 1961 Act lack these modern governance standards, potentially making them more vulnerable to mismanagement and less attractive to institutional investors who require robust governance frameworks.

4. Employment and Local Rights Protection

Local organizations claim that the regulatory vacuum has led to a monopoly by private companies with no regulations ensuring job reservations for locals in the private sector, unlike the government sector which provides such protections. This creates a situation where:

• Non-local companies can establish operations without adequate safeguards for local employment
• The absence of modern CSR provisions means reduced corporate accountability to local communities
• Limited legal recourse for stakeholders under an outdated regulatory framework

5. Tax Classification Issues

Companies registered under the Sikkim Registration of Companies Act, 1961 are assessed as Association of Persons (AOP) under Income Tax law rather than as corporate entities, since the definition of 'Company' under Section 2(22A) of the Income Tax Act does not include companies registered under the Sikkim Act. This creates:

• Differential tax treatment compared to companies in other states
• Complexity in tax planning and financial structuring
• Potential disadvantages in cross-border transactions and treaty benefits

6. Exclusion from National Corporate Database

The absence of integration with the MCA21 portal means Sikkim companies are excluded from the national corporate database. This creates problems in:

• Credit rating and due diligence processes
• Banking and financial service access
• Government tender participation
• Inter-corporate transactions requiring verification

POSITIVE ASPECTS: POTENTIAL BENEFITS FOR SIKKIM

Despite the challenges, there are arguments for why Sikkim might benefit from a carefully calibrated approach to implementing the Companies Act, 2013:

1. Protection of Local Interests

Article 371F was designed to protect Sikkim's unique identity and interests. A modified implementation of the Companies Act could incorporate special provisions that:

Mandate local employment quotas in private companies

Ensure priority for Sikkimese entrepreneurs in certain business sectors

Protect traditional business practices and community enterprises

Require special consent for land acquisition by corporations

Article 371F(f) empowers Parliament to make provisions protecting the rights and interests of different sections of Sikkim's population, which could be extended to corporate regulation.

2. Customized Corporate Framework

Rather than wholesale adoption, Sikkim has the opportunity to negotiate a customized version of the Companies Act, 2013 that:

Incorporates modern governance standards while respecting local sensibilities

Creates simplified compliance mechanisms for small and medium enterprises

Establishes special economic zones with tailored corporate regulations

Integrates environmental protection requirements suited to Sikkim's ecological sensitivity

3. Border State Strategic Considerations

As a border state with strategic importance, Sikkim could benefit from:

Enhanced scrutiny mechanisms for foreign investment in sensitive sectors

Special provisions for businesses involved in border trade

Customized regulations for tourism and hospitality sectors critical to the state's economy

Protected sectors where local ownership is mandated

4. Leveraging Tax Exemptions

Sikkim's unique income tax exemption for residents could be strategically combined with modern corporate regulations to create an attractive business environment, positioning Sikkim as:

A hub for regional headquarters of national companies

An innovation and research center with tax advantages

A destination for specific industries that can benefit from the tax regime while contributing to local development

5. Phased Implementation Advantage

The delay in implementation provides Sikkim the advantage of learning from experiences across India, allowing the state to:

Adopt best practices while avoiding problematic provisions

Design implementation mechanisms that prevent the compliance burden on small businesses

Create support infrastructure before full-scale rollout

Establish entrepreneur education and awareness programs

RECOMMENDED WAY FORWARD

1. Immediate Actions Required

Stakeholder Consultation: The Sikkim government must urgently engage with local business communities, civil society organizations, legal experts, and the Ministry of Corporate Affairs to understand concerns and aspirations comprehensively.

Draft Special Provisions: Utilize the constitutional authority under Article 371F to draft special provisions that can be incorporated into the Companies Act implementation for Sikkim, addressing:

• Local employment protection
• Environmental safeguards
• Small business exemptions
• Land ownership restrictions
• Strategic sector protections
• Interim Regulatory Framework: Until full implementation, establish clear interim guidelines that:
• Define the legal status of companies in transition
• Provide a roadmap for existing companies to convert to the 2013 Act framework
• Clarify tax treatment and compliance requirements
• Establish provisional access to digital filing systems

2. Customized Implementation Model

The "Sikkim Corporate Code": Create a Sikkim-specific corporate code that:

• Adopts the Companies Act, 2013 as the base framework
• Incorporates Schedule provisions protecting local interests under Article 371F
• Establishes a Sikkim Corporate Facilitation Center to assist businesses with compliance
• Creates simplified procedures for micro and small enterprises
• Mandates CSR spending priorities aligned with Sikkim's development goals
• Digital Infrastructure Development: Partner with MCA to:
• Establish Sikkim-specific modules on the MCA21 portal
• Create facilitation centers in all districts
• Provide training and capacity building for entrepreneurs
• Develop multilingual support systems

3. Safeguarding Local Interests

Employment Reservation Framework: Introduce mandatory provisions requiring:

• Minimum percentage of local employment in private companies
• Skills development programs funded by corporate entities
• Preferential procurement from local businesses
• Transparency in hiring practices
• Environmental and Cultural Protection: Establish:
• Mandatory environmental impact assessments for corporate activities
• Protection of ecologically sensitive areas from commercial exploitation
• Respect for traditional land use patterns and community rights
• Cultural impact assessments for large projects

4. Economic Development Strategy

Sikkim Business Advantage: Position Sikkim as offering:

• Tax efficiency combined with modern corporate governance
• Simplified compliance for genuine small businesses
• Strategic location for regional trade
• Quality of life advantages for corporate operations
• Green and sustainable business certification
• Industry Focus: Target specific sectors where Sikkim can excel:
• Organic agriculture and processing
• Eco-tourism and hospitality
• IT and knowledge services (leveraging tax benefits)
• Pharmaceutical and healthcare (utilizing biodiversity resources sustainably)
• Renewable energy and environmental technologies

CONCLUSION

The non-applicability of the Companies Act, 2013 in Sikkim represents both a significant challenge and a unique opportunity. The current situation is clearly unsustainable, creating legal uncertainty, limiting economic opportunities, and placing Sikkimese entrepreneurs at a disadvantage. However, the constitutional protections under Article 371F provide a framework for crafting a solution that brings Sikkim into the modern corporate regulatory environment while genuinely protecting the state's unique interests.

The way forward requires urgent action by the Sikkim government to engage constructively with the Ministry of Corporate Affairs, not merely to accept or reject the Companies Act, 2013, but to negotiate a customized implementation that serves both national corporate governance standards and Sikkim's special constitutional status. This balanced approach can transform Sikkim from a regulatory outlier into a model for how special constitutional provisions can be harmonized with national economic integration, creating prosperity while preserving identity.

The stakeholders—government, businesses, civil society, and citizens—must recognize that this is not a binary choice between complete acceptance or total rejection, but rather an opportunity to craft a "third way" that serves Sikkim's long-term interests in an increasingly integrated national and global economy. The time for consultation, decision, and action is long overdue; further delay only compounds the disadvantages while squandering the opportunities that a thoughtful resolution could unlock.

#CA #CAGANGTOK #COMPANIESACT2013 #371F #EXEMPTION #NONAPPLCABILITY #2013

Sikkim's Tourism Sustainable Development (TSD) Fee: A Comprehensive Guide for Tourism Businesses and Visitors - By Anant Lall Gupta

 

Sikkim's Tourism Sustainable Development (TSD) Fee: A Comprehensive Guide for Tourism Businesses and Visitors

CA ANANT LALL GUPTA, GANGTOK, SIKKIM.

Sikkim's Tourism Sustainable Development (TSD) Fee is a statutory, Rs. 50 per‑tourist entry fee introduced to support eco‑friendly tourism infrastructure and protect the state's fragile Himalayan ecology. As a finance professional based in Gangtok, this note sets out the legal basis, effective period, coverage, exemptions, collection mechanism, and purpose of the levy in practical terms for tourism businesses and visitors.

Legal Basis and Start Date

The TSD Fee has been introduced under the Sikkim Registration of Tourist Trade Act, 2024 and the Sikkim Registration of Tourist Trade Rules, 2025, which empower the Tourism & Civil Aviation Department to levy a tourism‑linked charge on visitors. Collection of the Tourism Sustainable Development (TSD) Fund through this fee commenced in March 2025, with operational notifications around 5–14 March 2025 and implementation aligned with hotel check‑ins from that period.

Period and Rate of Levy

The current notified rate is Rs. 50 per tourist, treated as an entry fee linked to the first check‑in in Sikkim. The fee covers a continuous stay in the state up to a maximum of 30 days, and is payable only where the tourist stays overnight in an accommodation unit; it is not a per‑room fee but a per‑guest charge.

Important Clarification on Re-entry

If tourists leave Sikkim and re-enter within the same month, they must pay the entry fee again. However, tourists who remain in the state continuously for up to a month pay only once regardless of how many times they change hotels or accommodation units during their stay.

Who is Covered and Who is Exempt

The fee applies to all tourists—domestic as well as international—entering Sikkim and availing overnight accommodation in registered units such as hotels, resorts, homestays, service apartments, and bed‑and‑breakfast establishments.

Exemptions

As per official communication, the following categories are exempt from the TSD Fee:

• Children below five years of age
• Persons visiting for government work

The charge is otherwise broadly applicable without differentiation by state of origin or nationality.

Collection Responsibility and Compliance

Registered tourist accommodation providers have the statutory responsibility to collect Rs. 50 per eligible tourist at the time of check‑in and to show this transparently in booking forms, receipts, or registration details.

Remittance Requirements

These entities must remit the accumulated TSD collections on a weekly basis into the designated government account through the "Atithi – Guest Information System, Sikkim". The collected fees must be transferred to the Tourism and Commercial Tax Division of the Finance Department with proper reporting.

Display Requirements

Tourism operators are required to display information regarding the TSD Fund at:

• Reception areas
• Websites
• Booking portals

This ensures transparency and awareness among guests about the fee and its purpose.

Penalties for Non-Compliance

Under Rule 83 of the SRTT Rules, 2025, non-compliant entities face escalating penalties:

• First month of default: Rs. 5,000 fine
• Second month of default: Rs. 10,000 fine
• Third consecutive month: De-registration from the tourism trade registry

The Tourism Department has issued recent directives (November–December 2025) noting that while some accommodation units have complied with the TSD Fund requirements, many establishments have not yet fulfilled this statutory obligation, prompting reinforced enforcement measures.

Key Operational Points for Hotels and Homestays (Practical View from Gangtok)

1. Billing and Accounting Systems

The TSD Fee should be mapped as a separate line item in your billing/Property Management System, to ensure clear audit trails and easy reconciliation with Atithi portal reports. This segregation is critical for:

• Transparent guest billing
• Accurate weekly remittance calculations
• Compliance verification during inspections

2. Record Maintenance

Maintain guest‑wise records showing:

• Name and contact details of tourists
• Check-in and check-out dates
• TSD Fee collection status (collected/exempt)
• Receipt numbers and dates
• Weekly remittance reference numbers

3. Weekly Remittance Discipline

Establish internal processes to ensure weekly remittance without fail:

• Designate a responsible person for TSD compliance
• Set up calendar reminders for weekly transfers
• Reconcile Atithi portal entries with your PMS data
• Maintain documentary evidence of all remittances

4. Compliance Documentation

Proper maintenance of guest‑wise records will be important from a tax and regulatory compliance standpoint, especially during:

• Departmental inspections
• Annual audits
• Registration renewals under the SRTT Act and Rules
• Tax assessments

5. Staff Training

Ensure front-desk and reservation staff are trained on:

• When to collect the fee (at check-in)
• Who is exempt (children under 5, government officials)
• How to explain the fee to guests
• Proper documentation procedures

Purpose and Use of the Fund

All collections are credited to the Tourism Sustainable Development (TSD) Fund, a dedicated pool earmarked for tourism‑related public investment.

Planned Utilization Areas

The government has indicated that these resources will be used to:

1. Infrastructure Development
   • Strengthening tourism infrastructure including roads and connectivity
   • Developing tourist facilities and amenities
   • Improving public transport and accessibility
2. Environmental Management
   • Improving cleanliness and waste management systems
   • Protecting biodiversity and natural habitats
   • Managing carrying capacity at sensitive tourist sites
3. Cultural Preservation
   • Supporting initiatives that preserve Sikkim's cultural heritage
   • Promoting responsible and sustainable tourism practices
   • Managing rising tourist footfalls responsibly
4. Community Development
   • Enhancing local community benefits from tourism
   • Building capacity of local tourism entrepreneurs
   • Promoting eco-friendly tourism initiatives

Conclusion

The TSD Fee represents Sikkim's commitment to balancing tourism growth with environmental and cultural sustainability. For tourism businesses, compliance is not merely a statutory obligation but a contribution to preserving the very assets that make Sikkim an attractive destination.

Immediate Action Items for Accommodation Providers:

• ✓ Update your billing systems to show TSD Fee as a separate line item
• ✓ Register/update your profile on the Atithi. Tutorial for portal link : https://atithigis.sikkim.gov.in/tutorial-details/2
• ✓ Display TSD Fee information at reception and on your website
• ✓ Train staff on collection and documentation procedures
• ✓ Set up weekly remittance processes
• ✓ Maintain detailed guest-wise records

For queries or clarification on TSD Fee compliance, tourism operators should contact the Tourism & Civil Aviation Department, Government of Sikkim, or consult with a local finance professional familiar with the SRTT framework.

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This note is prepared for general guidance and does not constitute legal or professional advice. Tourism operators should verify current requirements with the Tourism Department and ensure compliance with all applicable provisions of the SRTT Act and Rules. CA SI

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KKIM CAGANGTOK CHARTEREDACCOUNTANT #CAANANTLALLGUPTA

Buckle up for a fun ride through Section 10(26AAA) of the Income Tax Act – no suits required, just popcorn and a chuckle - By CA Anant Lall Gupta

 Hey folks in Sikkim (and tax-curious everywhere)! 😎 Ever wondered why we're basically living in India's ONLY tax-free paradise? Buckle up for a fun ride through Section 10(26AAA) of the Income Tax Act – no suits required, just popcorn and a chuckle.#CA #CAGANGTOK #CASIKKIM #GANGTOK #SIKKIM​

Sikkim's Tax Party: A Quick History Lesson

Picture this: Back in the day, Sikkim was its own kingdom under the Chogyal Dynasty, chilling with the Sikkim Income Tax Manual of 1948 – think low-key local taxes, no big bad central drama. Fast-forward to 1975, we merge with India as the 22nd state (thanks, Article 371F!), but India promises: "No messing with your wallet!" The big Income Tax Act, 1961? It didn't crash our party till 1989 via the Finance Act – that's when Notification SO 148(E) said, "Welcome aboard, but with perks." Story time: Imagine your grandpa's register from April 25, 1975 – that's your golden ticket! 😂​

Who's the VIP at This Tax-Free Bash? (Bare Act Definitions)

Section 10(26AAA) spells it out crystal clear: You're "Sikkimese" if your name (or your dad's, hubby's, paternal grandpa's, or same-dad bro's) was in the Sikkim Subjects Register pre-merger (rules from 1961). Bonus: Those added via Govt Orders in 1990/1991, or proven "should've been there" peeps. No random tourists – must be residents proving roots! Even Supreme Court nods expanded it to pre-1975 domiciled Indians' kids. Pro tip: Grab that Sikkim Subject Certificate.​

What Incomes Get the "No Tax" High-Five?

• Income from ANY source INSIDE Sikkim (salary, biz, rentals – cha-ching!).

• Dividends or interest on securities (anywhere – jackpot!).
  But outside Sikkim earnings? Pay up, buttercup – no free lunch there. Funny story: Buddy earns in Delhi? Taxman says hi. But Sikkim salary? Poof exempt!​

The Plot Twist: Returns Are STILL a Must! 📝

Zero tax? Sweet! But filing ITR? NON-NEGOTIABLE, no exemptions here. Declare that income, claim 10(26AAA), or risk notices faster than Gangtok traffic. It's like gym membership – you might skip, but rules say show up!​

#CASikkim #TaxFreeSikkim #10(26AAA) #IncomeTax #CAGangtok #Charteredaccountant #Sikkim #Taxconsultant

Tax Law Transition: Section 10(26) Moves to Schedule III, S.No. 19 of the Income Tax Act, 2025 -By CA Anant Lall Gupta

Tax Law Transition: Section 10(26) Moves to Schedule III, S.No. 19 of the Income Tax Act, 2025

A Professional Guide for Tax Practitioners and HR Teams in North-Eastern States and Scheduled Areas

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For tax professionals and HR teams serving clients in India's North-Eastern states and scheduled areas, understanding the continuity of critical tax exemptions during the transition from the Income Tax Act, 1961 to the Income Tax Act, 2025 is essential. This article examines the preservation and relocation of the vital tax exemption previously available under Section 10(26), which will now be codified in Schedule III, Serial Number 19 of the new Income Tax Act, 2025 (effective from Assessment Year 2026-27).

Understanding Section 10(26): A Socio-Economic Policy Tool

Section 10(26) of the Income Tax Act, 1961 represents a critical socio-economic measure designed to promote economic empowerment and financial inclusion in India's specified tribal areas. This provision grants a significant tax exemption to individual members of Scheduled Tribes residing in designated regions.

Eligibility Criteria Under the Current Law

The exemption under Section 10(26) is subject to strict eligibility conditions:

1. Individual Assessee Requirement

The benefit is exclusively available to individuals. It does not extend to:

• Hindu Undivided Families (HUFs)
• Partnership firms
• Companies
• Association of Persons (AOPs)
• Body of Individuals (BOIs)

2. Scheduled Tribe Status

The assessee must be a member of a Scheduled Tribe as notified under:

• Article 342 of the Constitution of India
• The Constitution (Scheduled Tribes) Order, 1950 (as amended from time to time)
• Relevant state-specific notifications

3. Residence Requirement

The individual must be ordinarily residing in one of the specified areas, which include:

• North-Eastern States: Arunachal Pradesh, Assam, Manipur, Meghalaya, Mizoram, Nagaland, and Tripura
• Union Territory: Ladakh
• Other Specified Areas: Certain districts and regions notified under the provision, including parts of West Bengal (Darjeeling district, including Kalimpong subdivision)

Scope of Exempt Income

The exemption under Section 10(26) covers two distinct categories of income:

Category A: Income Arising from Sources in the Specified Area

This includes all types of income that arise from sources located within the specified area:

• Salary income earned from employment within the specified area
• Business or professional income derived from operations conducted in the specified area
• Rental income from properties situated in the specified area
• Capital gains from transfer of assets located in the specified area
• Income from other sources that arise within the specified area

Category B: Dividend and Interest Income

This category enjoys broader exemption:

• Dividend income from any company (whether the company is located inside or outside the specified area)
• Interest on securities (irrespective of where the securities are issued or where the issuing entity is located)

This distinction is crucial: while most income must both arise from and be earned by a resident of the specified area, dividend and interest income is exempt based solely on the residential status of the recipient.

The Legislative Transition: Income Tax Act, 2025

The Government of India has undertaken a comprehensive overhaul of the income tax legislation through the enactment of the Income Tax Act, 2025. This modernization effort aims to:

• Simplify the tax code and improve readability
• Consolidate scattered provisions into logical groupings
• Reduce ambiguity and litigation
• Align the law with contemporary economic realities

Structural Reorganization of Exemptions

One of the key features of the 2025 Act is the reorganization of exemptions:

Previous Structure (1961 Act)

• All exemptions were listed as sub-clauses within the lengthy Section 10
• Over 40 different types of exemptions were crammed into a single section
• Cross-referencing and navigation was cumbersome

New Structure (2025 Act)

• Exemptions are systematically organized into separate Schedules
• Each Schedule addresses a specific category of exemptions
• Tabular format enhances clarity and ease of reference
• Schedule III specifically deals with exemptions related to socio-economic considerations

Location of the Tribal Area Exemption in the 2025 Act

The tax relief previously granted under Section 10(26) of the 1961 Act is fully preserved and will be codified in:

Schedule III of the Income Tax Act, 2025
Serial Number 19

This relocation confirms the government's commitment to maintaining this important social policy benefit, ensuring continuity of financial relief for eligible communities despite the comprehensive legislative overhaul.

Effective Date and Transition

• The Income Tax Act, 2025 will become effective from April 1, 2026 (Assessment Year 2026-27)
• For Financial Year 2025-26 (Assessment Year 2026-27) onwards, taxpayers and practitioners should reference Schedule III, S.No. 19
• All income earned during FY 2024-25 and earlier years will continue to be governed by Section 10(26) of the 1961 Act

Compliance Challenges: What Remains Unchanged

While the legislative framework is being modernized, the fundamental compliance challenges associated with claiming this exemption remain substantial. Tax authorities continue to rigorously scrutinize claims, and practitioners must be prepared to address these hurdles.

Challenge 1: The Dual Requirement Test

The most significant compliance challenge involves satisfying the dual requirement for most types of income (excluding dividend and interest):

Requirement A: Ordinary Residence in Specified Area

The assessee must establish that they are ordinarily residing in the specified area. This is not a mere formality but requires substantive evidence:

• Physical presence in the specified area for a substantial part of the year
• Maintenance of a dwelling place in the specified area
• Family and social ties rooted in the specified area
• Registration of address with government authorities (Aadhaar, voter ID, etc.)

Requirement B: Source of Income in Specified Area

Simultaneously, the income (other than dividend/interest) must arise from a source within the specified area:

• For salary: The employer's place of business and the location where services are rendered
• For business income: The location of business operations, not merely the registered office
• For rental income: The physical location of the property
• For professional income: Where professional services are actually performed

Challenge 2: The Remote Work Dilemma

The rise of remote work and digital employment has created new complexities:

Scenario 1: ST Member Working Remotely for Non-Local Employer

An individual residing in Shillong (Meghalaya) works remotely for a company based in Bangalore. Key questions:

• Where does the salary income "arise"?
• Is the source in Meghalaya (where work is performed) or Karnataka (where employer is located)?
• What documentation proves the work location?

Scenario 2: Digital Nomad ST Members

ST members who travel frequently while maintaining nominal residence in the specified area face heightened scrutiny regarding their "ordinary residence" claim.

Scenario 3: Hybrid Work Arrangements

Employees who split time between the specified area and metro cities must carefully track and allocate their income between exempt and taxable portions.

Challenge 3: Documentation Requirements

The foundation of any valid claim under this provision rests on comprehensive and irrefutable documentation:

Primary Documents (Mandatory)

1. Scheduled Tribe Certificate
   • Issued by the competent authority (usually the District Magistrate or designated revenue officer)
   • Must be current and valid
   • Should clearly state the tribe name and the applicant's membership
   • Obtained in accordance with the relevant state/UT rules
2. Proof of Ordinary Residence
   • Aadhaar card showing address in the specified area
   • Voter ID card registered in the specified area
   • Ration card or domicile certificate
   • Electricity bills, property tax receipts, or rental agreements
   • Bank account statements showing local address
   • Educational certificates of children showing local schools (if applicable)

Supporting Documents (Source-Specific)

For Salary Income:

• Employment contract specifying work location
• Posting orders or transfer orders
• Attendance records or biometric logs from office in specified area
• Form 16 showing employer's address
• Office location certificate from employer

For Business/Professional Income:

• Business registration certificates (GST, Shop & Establishment, etc.) showing address in specified area
• Lease agreements for business premises
• Invoices issued to clients showing business address
• Professional engagement letters specifying service delivery location
• Client testimonials or project completion certificates with location details

For Rental Income:

• Property ownership documents (sale deed, title deed)
• Property tax receipts from local municipal authority
• Rental agreements with tenants
• Address proof of the property

For Dividend and Interest:

• Portfolio statements showing securities held
• Form 16A/TDS certificates
• Bank statements showing dividend/interest credits
• (Note: For this category, only residence proof is needed, not source proof)

Challenge 4: Assessment and Reassessment Risk

Claims under this exemption attract heightened scrutiny:

• Notice under Section 143(2): Assessing Officers frequently issue scrutiny notices for returns claiming this exemption
• Detailed questionnaires: Expect extensive queries about residence and source
• Field verification: Revenue authorities may conduct physical verification of residence and business location
• Reassessment risk: Inadequate documentation can lead to reassessment proceedings years later

Strategic Guidance for Tax Professionals

As tax practitioners serving clients in specified areas across North-Eastern states and other notified regions, consider the following strategic approaches:

1. Proactive Documentation Strategy

• Maintain a comprehensive documentation checklist for each client claiming the exemption
• Update residence proof annually
• For salaried clients, obtain employer certificates at year-end confirming work location
• For business clients, maintain contemporaneous records of where business activities occur
• Create a dedicated file for each client with all exemption-related documents

2. Remote Work Documentation Protocol

For clients in remote work arrangements:

• Obtain detailed work-from-home letters from employers specifying the approved work location
• Maintain daily work logs showing work performed from the specified area
• Keep records of internet bills, co-working space invoices, or home office setup in the specified area
• Document any travel outside the specified area and adjust exemption claims accordingly

3. Transition Planning for 2025 Act

• Familiarize your team with the new Schedule III, S.No. 19 reference
• Update all return preparation software and templates for AY 2026-27 onwards
• Prepare client communication explaining the legislative change while assuring continuity of benefits
• Monitor any subordinate legislation or CBDT circulars clarifying the application of the new provision

4. Client Education and Expectation Management

• Educate clients about the dual requirement (residence + source) at the outset
• Set realistic expectations about documentation burden
• Advise clients to maintain clean, contemporaneous records rather than scrambling during assessment
• For ambiguous situations (e.g., partial year residence), recommend conservative approach or professional consultation

5. Litigation Preparedness

• Stay updated with relevant case law and tribunal decisions
• Build relationships with legal counsel experienced in tribal taxation matters
• Maintain precedent files of favorable rulings
• Consider advance ruling applications for complex fact patterns

Common Scenarios and Practical Solutions

Scenario 1: Salaried Employee Transferred Outside Specified Area Mid-Year

Facts: ST member ordinarily residing in Shillong transferred to Delhi on September 1, 2025.

Solution:

• Salary for April–August 2025: Fully exempt (both residence and source in specified area)
• Salary for September 2025–March 2026: Taxable (source outside specified area)
• Obtain separate Form 16 or certificate from employer allocating salary between periods
• File return showing proportionate exemption claim

Scenario 2: Business Income with Mixed Operations

Facts: ST member runs a consultancy from Imphal but occasionally provides services to clients in Kolkata and Mumbai.

Solution:

• Maintain detailed project-wise records showing:
  • Projects executed entirely from Imphal (work, meetings, deliverables all from Imphal): Fully exempt
  • Projects requiring travel and work outside Manipur: Allocate income based on time/effort spent in vs. outside specified area
• Use conservative allocation methodology
• Document basis of allocation for audit defense

Scenario 3: Rental Income from Multiple Properties

Facts: ST member owns properties in both Aizawl (Mizoram) and Siliguri (West Bengal, outside specified area under Section 10(26)).

Solution:

• Rental income from Aizawl property: Exempt under Schedule III, S.No. 19
• Rental income from Siliguri property: Fully taxable
• Maintain separate rent agreements and bank accounts for clarity
• Clearly segregate in the income tax return

Scenario 4: Dividend and Interest Income

Facts: ST member residing in Itanagar receives dividend from TCS (Mumbai-based) and interest from SBI bonds.

Solution:

• Both dividend and interest: Fully exempt regardless of source location
• Only residential status in specified area needs to be proven
• Simpler documentation requirement compared to other income types

The Road Ahead: Preparing for Schedule III, S.No. 19

The transition from Section 10(26) to Schedule III, S.No. 19 is more than a mere renumbering exercise. It represents an opportunity for tax professionals to:

1. Revisit and strengthen documentation protocols to ensure seamless compliance under the new legislative framework
2. Engage with clients early to explain the transition and ensure no disruption in claiming legitimate exemptions
3. Leverage the reorganized structure of the 2025 Act to provide clearer, more confident advice
4. Monitor CBDT guidance as the new Act comes into force, particularly any clarificatory circulars on the application of Schedule III provisions
5. Build expertise in the socio-economic exemptions that will be critical for clients in the North-Eastern region and other specified areas

Conclusion

The relocation of the tribal area income exemption from Section 10(26) to Schedule III, S.No. 19 of the Income Tax Act, 2025 preserves a vital socio-economic benefit while modernizing its legislative home. For tax professionals and HR teams in North-Eastern states and other specified areas, the substance of the exemption remains unchanged, but the transition offers an opportunity to strengthen compliance practices and documentation protocols.

The dual challenge of proving ordinary residence in the specified area and demonstrating that income arises from sources within that area remains the central compliance hurdle. In an era of remote work, digital businesses, and complex financial arrangements, this challenge is more acute than ever.

Success in navigating this exemption—whether under the 1961 Act or the 2025 Act—depends on:

• Meticulous documentation maintained contemporaneously, not retrospectively
• Clear understanding of the residence-source dual test
• Conservative approach in ambiguous situations
• Proactive communication with clients and tax authorities

As we prepare for the Income Tax Act, 2025 to take effect, let us ensure that the eligible members of Scheduled Tribes continue to receive the full benefit of this important exemption, now enshrined in Schedule III, Serial Number 19.

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About the Author

CA Anant Lall Gupta is a Chartered Accountant based in Gangtok, specializing in tax compliance and advisory for individuals and businesses in the North-Eastern region and scheduled areas. With 4 years pre qualification of experience in navigating the unique tax provisions applicable to scheduled areas, He advises clients on optimizing legitimate tax benefits while maintaining robust compliance.

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Disclaimer

This article is intended for general informational purposes only and does not constitute professional tax advice. The application of tax laws depends on specific facts and circumstances. Readers should consult with qualified tax professionals before making decisions based on this information. The author and publisher assume no liability for actions taken based on the content of this article.

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