Certain conditions for applicability of tonnage tax scheme
[Section-232 as per the Income Tax Act, 2025 (this Act) w.e.f. 1st April, 2026.]
Section 232(1) of Income Tax Act 2025
232(1) A tonnage tax company shall, subject to and as per the provisions of this section, be required to credit to a reserve account (herein referred to as the Tonnage Tax Reserve Account) an amount, being 20% or more of the book profit derived from the activities referred to in section 228(1)(a) and (b) in each tax year to be utilised in the manner laid down in sub-section (6).
Section 232(2) of Income Tax Act 2025
232(2) In this section, “book profit” shall have the meaning assigned to it in section 206(2) so far as it relates to the income derived from the activities referred to in section 228(1)(a) and (b).
Section 232(3) of Income Tax Act 2025
232(3) Where the company has––
- (a) book profit from the business of operating qualifying ships; and
- (b) book loss from any other sources,
- and consequently, the company is not in a position to create the full or any part of the reserves under sub-section (1), the company shall create the reserves to the extent possible in that tax year and the shortfall, if any, shall be added to the reserves required to be created for the following tax year and such shortfall shall be deemed to be part of the reserve requirement of that following tax year.
Section 232(4) of Income Tax Act 2025
232(4) For the purposes of sub-section (3), to the extent the shortfall in creation of reserves during a particular tax year is carried forward to the following tax year under the said sub-section, the company shall be considered as having created sufficient reserves for the first mentioned tax year.
Section 232(5) of Income Tax Act 2025
232(5) Nothing contained in sub-section (4) shall apply in respect of the second year in case the shortfall in creation of reserves continues for two consecutive tax years.
Section 232(6) of Income Tax Act 2025
232(6) The amount credited to the Tonnage Tax Reserve Account under sub-section (1) shall be utilised by the company before the expiry of eight years following the tax year in which the amount was credited—
- (a) for acquiring a new ship or new inland vessel, as the case may be, for the purposes of the business of the company; and
- (b) until the acquisition of a new ship or new inland vessel, as the case may be, for the purposes of the business of operating qualifying ships other than for distribution by way of dividends or profits or for remittance outside India as profits or for the creation of any asset outside India.
Section 232(7) of Income Tax Act 2025
232(7) Where any amount credited to the Tonnage Tax Reserve Account under sub-section (1),—
- (a) has been utilised for any purpose other than that referred to in sub-section (6); or
- (b) has not been utilised for the purpose specified in sub-section (6)(a); or
- (c) has been utilised for the purpose of acquiring a new ship or new inland vessel, as the case may be, as specified in sub-section (6)(a), but such ship or new inland vessel, as the case may be, is sold or otherwise transferred, other than in any scheme of demerger by the company to any person at any time before the expiry of three years from the end of the tax year in which it was acquired,
- an amount which bears the same proportion to the total relevant shipping income of the year in which such reserve was created, as the amount out of such reserve so utilised or not utilised bears to the total reserve created during that year under sub-section (1) shall be taxable under the other provisions of this Act—
- (i) in a case referred to in clause (a), in the year in which the amount was so utilised; or
- (ii) in a case referred to in clause (b), in the year immediately following eight years specified in sub-section (6); or
- (iii) in a case referred to in clause (c), in the year in which the sale or transfer took place.
Section 232(8) of Income Tax Act 2025
232(8) The income so taxable under the other provisions of this Act, referred to in sub-section (7), shall be reduced by the proportionate tonnage income charged to tax in the year of creation of such reserves.
Section 232(9) of Income Tax Act 2025
232(9) Irrespective of anything contained in any other provision of this Part, where the amount credited to the Tonnage Tax Reserve Account as per sub-section (1) is less than the minimum amount required to be credited under sub-section (1), an amount which bears the same proportion to the total relevant shipping income, as the shortfall in credit to the reserves bears to the minimum reserve required to be credited under sub-section (1), shall not be taxable under the tonnage tax scheme and shall be taxable under the other provisions of this Act.
Section 232(10) of Income Tax Act 2025
232(10) If the reserve required to be created under sub-section (1) is not created for any two consecutive tax years, the option of the company for tonnage tax scheme shall cease to have effect from the beginning of the tax year following the second consecutive tax year in which the failure to create the reserve under sub-section (1) had occurred.
Section 232(11) of Income Tax Act 2025
232(11) In this section, “new ship” or “new inland vessel”, as the case may be, includes a qualifying ship which, before the date of acquisition by the qualifying company was used by any other person, if it was not at any time previous to the date of such acquisition owned by any person resident in India.
Section 232(12) of Income Tax Act 2025
232(12) A tonnage tax company, after its option has been approved under section 231(4), shall comply with the minimum training requirement in respect of trainee officers as per the guidelines made by the Director-General of Shipping and notified by the Central Government.
Section 232(13) of Income Tax Act 2025
232(13) The tonnage tax company shall be required to furnish a copy of the certificate issued by the Director-General of Shipping in the form and manner as prescribed, along with the return of income under section 263 to the effect that such company has complied with the minimum training requirement as per the guidelines referred to in sub-section (12) for the tax year.
Section 232(14) of Income Tax Act 2025
232(14) If the minimum training requirement is not complied with for any five consecutive tax years, the option of the company for tonnage tax scheme shall cease to have effect from the beginning of the tax year following the fifth consecutive tax year in which the failure to comply with the minimum training requirement as per sub-section (12) had occurred.
Section 232(15) of Income Tax Act 2025
232(15) In the case of every company which has opted for tonnage tax scheme, not more than 49% of the net tonnage of the qualifying ships operated by it during any tax year shall be chartered in.
Section 232(16) of Income Tax Act 2025
232(16) The proportion of net tonnage referred to in sub-section (15) in respect of a tax year shall be calculated based on the average of net tonnage during that tax year.
Section 232(17) of Income Tax Act 2025
232(17) For the purposes of sub-section (16), the average of net tonnage shall be computed in such manner, as prescribed, in consultation with the Director-General of Shipping.
Section 232(18) of Income Tax Act 2025
232(18) Where the net tonnage of ships or new inland vessel, as the case may be, chartered in exceeds the limit under sub-section (15) during any tax year, the total income of such company in relation to that tax year shall be computed as if the option for tonnage tax scheme does not have effect for that tax year.
Section 232(19) of Income Tax Act 2025
232(19) Where the limit under sub-section (15) had exceeded in any two consecutive tax years, the option for tonnage tax scheme shall cease to have effect from the beginning of the tax year following the second consecutive tax year in which the limit had exceeded.
Section 232(20) of Income Tax Act 2025
232(20) In this section, the term “chartered in” shall exclude a ship or new inland vessel, as the case may be, chartered in by the company on bareboat charter-cum-demise terms.
Section 232(21) of Income Tax Act 2025
232(21) An option for tonnage tax scheme by a tonnage tax company shall not have effect in relation to a tax year unless such company—
- (a) maintains separate books of account in respect of the business of operating qualifying ships; and
- (b) furnishes, before the specified date referred to in sections 63, the report of an accountant, in the prescribed form, duly signed and verified by such accountant.
Section 232(22) of Income Tax Act 2025
232(22) A temporary cessation (as against permanent cessation) of operating any qualifying ship by a company shall not be considered as a cessation of operating of such qualifying ship and the company shall be deemed to be operating such qualifying ship for the purposes of this Part.
Section 232(23) of Income Tax Act 2025
232(23) Where a qualifying company continues to operate a ship or new inland vessel, as the case may be, which temporarily ceases to be a qualifying ship, such ship or inland vessel, as the care may be shall not be deemed as a qualifying ship for the purposes of this Part
FAQs on Section 232 of Income Tax Act 2025
What is the Tonnage Tax Reserve Account and how much must be credited to it?
A tonnage tax company must credit at least 20% of its book profit derived from activities under section 228(1)(a) and (b) to a Tonnage Tax Reserve Account each tax year.
How is “book profit” defined for the purposes of this section?
“Book profit” refers to the meaning assigned in section 206(2) but only in relation to income from the specified activities under section 228(1)(a) and (b).
What if a company has a book profit from shipping operations but an overall book loss?
If a company has book profit from operating qualifying ships but an overall book loss, it must still create the reserve to the extent possible and carry forward the shortfall to the next tax year. The shortfall is deemed part of the next year’s reserve requirement.
Will the company be treated as compliant if it carries forward the reserve shortfall to the next year?
Yes, for the first year of shortfall, the company is considered to have created sufficient reserves if the shortfall is carried forward. However, this does not apply if the shortfall continues for two consecutive years.
How must the Tonnage Tax Reserve be utilised?
It must be used within eight years to acquire a new ship or new inland vessel for business use. Until such acquisition, it cannot be used for dividends, profit remittance abroad, or for creating assets outside India.
What happens if the reserve is misused or not utilised as prescribed?
A proportionate amount of relevant shipping income becomes taxable under regular provisions based on the extent of misuse or non-utilisation, in the year of such occurrence.
Is there any tax relief if income is taxed under regular provisions due to reserve misuse?
Yes, the income taxed under regular provisions shall be reduced by the proportionate tonnage income already taxed in the year the reserve was created.
What if the company fails to credit the required minimum amount to the reserve?
The proportionate income corresponding to the shortfall becomes taxable under regular provisions and not under the tonnage tax scheme.
Can failure to create the reserve affect the company’s eligibility for tonnage tax?
Yes, failure to create the required reserve for two consecutive years leads to loss of tonnage tax scheme eligibility from the following tax year.
What qualifies as a “new ship” or “new inland vessel”?
It includes qualifying ships or inland vessels previously used by others, provided they were not owned by any resident in India before acquisition.
Are there training requirements under the tonnage tax scheme?
Yes, the company must comply with minimum trainee officer training requirements as per guidelines of the Director-General of Shipping.
How must compliance with training requirements be reported?
A certificate from the Director-General of Shipping must be submitted with the income return under section 263 to confirm compliance.
What if a company fails to meet training requirements for five consecutive years?
The tonnage tax scheme option will cease from the beginning of the tax year following the fifth year of non-compliance.
Is there a limit to how much tonnage a company can charter in?
Yes, not more than 49% of the net tonnage of qualifying ships operated in any tax year can be chartered in.
How is the proportion of net tonnage calculated?
It is based on the average net tonnage during the tax year, computed as prescribed in consultation with the Director-General of Shipping.
What happens if the charter-in tonnage limit is exceeded in a tax year?
The company’s total income for that tax year will be computed as if the tonnage tax scheme does not apply.
What if the charter-in limit is exceeded for two consecutive years?
The company will lose its tonnage tax scheme eligibility from the beginning of the tax year following the second consecutive excess.
Are there any exceptions to the “chartered in” definition?
Yes, ships chartered on bareboat charter-cum-demise terms are excluded from the “chartered in” definition.
What are the recordkeeping and reporting requirements for tonnage tax companies?
They must maintain separate books for qualifying ship operations and submit a report of an accountant by the specified date.
Does temporary cessation of a qualifying ship’s operation affect its status?
No, a temporary cessation does not affect its status; the company is deemed to be operating the ship during such periods.
What if a ship ceases to qualify temporarily but continues to be operated?
It is not treated as a qualifying ship for that period, and income from it does not qualify under the tonnage tax scheme.
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