Tonnage Tax Scheme for Shipping Companies: Eligibility, Rates and Conditions (Income Tax Act 2025)

The tonnage tax scheme lets an Indian shipping company pay tax on a fixed notional income worked out from the net tonnage of its ships, instead of on its actual profit from operating them. It is optional, it is found in sections 225 to 235 of the Income-tax Act, 2025, and the daily income starts at Rs 70 for each 100 tons for ships up to 1,000 net tons (section 227(3)). The option lasts ten years and comes with a 20% reserve requirement, a 49% cap on chartered-in tonnage and a training requirement.

This guide covers who can opt, how tonnage income is calculated, what the company must do each year, and how an option ends. Every figure comes from the Act (as amended by the Finance Act, 2026) and Rule 146 of the Income-tax Rules, 2026. It applies to tax year 2026-27 onwards. It does not map these sections to the 1961 Act.

What is the tonnage tax scheme under the Income Tax Act 2025?

Section 225 says that a company may, at its option, compute income from the business of operating qualifying ships under this Part of the Act. That income is treated as profits and gains of business or profession. Under section 226(7), the tonnage income is computed under section 227, and the "relevant shipping income" (the actual profit from core and incidental shipping activities) is not chargeable to tax.

The tonnage tax business is a separate business from everything else the company does (section 226(3)), and its profit is computed separately (section 226(4)). A company that has not opted, or is not covered, computes its shipping profit under the normal provisions (section 226(6)).

Which companies and ships qualify?

Section 235(h) defines a qualifying company. All four conditions must be met:

• it is an Indian company;
• its place of effective management is in India (where the board or executive directors make decisions, or where the officers who take the commercial and strategic decisions work);
• it owns at least one qualifying ship; and
• its main object is to carry on the business of operating ships.

Section 235(i) defines a qualifying ship. It must be a seagoing ship, vessel or inland vessel of 15 net tonnage or more, registered under the Merchant Shipping Act, 1958 (or a foreign-registered ship with a licence from the Director-General of Shipping under section 406 or 407 of that Act, or an inland vessel registered under the Inland Vessels Act, 2021), with a valid certificate showing its net tonnage in force.

Not a qualifying ship (section 235(i))
A ship mainly used to provide goods or services of a kind normally provided on land
Fishing vessels and factory ships
Pleasure crafts (primary use is sport or recreation)
Harbour and river ferries
Offshore installations
A qualifying ship used as a fishing vessel for more than 30 days in a tax year

A company is also treated as "operating" a ship if it operates it whether owned or chartered, including a part of a ship chartered in through a slot, space or joint charter. A ship given out on bareboat charter-cum-demise terms, or on bareboat charter for more than three years, is not treated as operated by that company (section 226(1)).

How is tonnage income calculated?

Section 227 uses one formula for every qualifying ship: TI = DTI x N. DTI is the daily tonnage income of the ship and N is the number of days in the tax year (or the part of it) for which the company operated the ship as a qualifying ship. The company's tonnage income is the total across all its qualifying ships.

Net tonnage of ship	Daily tonnage income (section 227(3))
Up to 1,000	Rs 70 for each 100 tons
Over 1,000 and up to 10,000	Rs 700 plus Rs 53 for each 100 tons above 1,000
Over 10,000 and up to 25,000	Rs 5,470 plus Rs 42 for each 100 tons above 10,000
Over 25,000	Rs 11,770 plus Rs 29 for each 100 tons above 25,000

Three details change the number you start from:

• Tonnage comes from the certificate. It is the net tonnage shown in the valid certificate (section 227(4)(a), (9)).
• Rounding. Tonnage is rounded to the nearest 100 tons. A remainder of 50 tons or more rounds up, less than 50 rounds down, and kilograms are ignored (section 227(5)). So 12,449 tons becomes 12,400 and 12,450 tons becomes 12,500.
• Deemed tonnage. Purchased slots, slot charters and shared break-bulk vessels add deemed tonnage (section 227(4)(b)). Rule 146(b) sets the basis: 2.5 TEU = 1 net tonnage; for break-bulk sharing, 19 cubic metres = 1 net tonnage where cargo is limited by volume, and 14 metric tons = 1 net tonnage where it is limited by weight.

No deduction or set-off is allowed against tonnage income (section 227(6)).

How much tax does a ship pay? Two worked examples (tax year 2026-27)

Example 1: one large ship for the full year. Assume a ship with a certified net tonnage of 12,400 operated for all 365 days of tax year 2026-27.

Step	Working	Result
1. Rounded tonnage	12,400 is already a multiple of 100	12,400
2. Slab	Over 10,000 and up to 25,000	Rs 5,470 + Rs 42 per 100 tons above 10,000
3. Tons above 10,000	12,400 - 10,000 = 2,400, which is 24 hundreds	24
4. Daily tonnage income	5,470 + (42 x 24) = 5,470 + 1,008	Rs 6,478
5. Tonnage income	6,478 x 365	Rs 23,64,470

Example 2: two ships, one operated for part of the year. Assume the company also operates a second ship of 28,300 net tons, but only for 200 days of the year.

Step	Working	Result
1. Slab	Over 25,000: Rs 11,770 + Rs 29 per 100 tons above 25,000
2. Tons above 25,000	28,300 - 25,000 = 3,300, which is 33 hundreds	33
3. Daily tonnage income	11,770 + (29 x 33) = 11,770 + 957	Rs 12,727
4. Tonnage income, ship 2	12,727 x 200	Rs 25,45,400
5. Add ship 1 from Example 1	23,64,470 + 25,45,400	Rs 49,09,870

The Rs 49,09,870 is the company's tonnage income, taxed as business profit. The company's actual profit from these ships does not change it, whether higher or lower. A shipping loss is ignored (section 228(13)).

What income is covered by the scheme?

Section 228 splits the shipping profit into core and incidental activities. Together they make up the "relevant shipping income", which is not separately taxed.

• Core activities (section 228(3)): operating qualifying ships; earnings from pooling arrangements; contracts of affreightment; on-board and on-shore activities of passenger ships or inland vessels (fares and food and beverages consumed on board); and slot charters, space charters, joint charters, feeder services and container box leasing in container shipping.
• Incidental activities (section 228(7), Rule 146(c)): maritime consultancy charges; income from loading or unloading of cargo; ship management fees or remuneration for managed vessels; and maritime education or recruitment fees.

Incidental profits have a ceiling. If their total exceeds 0.25% of the turnover from core activities, the excess is taxed under the other provisions of the Act (section 228(2)).

Example 3: the incidental income cap. Assume core turnover of Rs 400 crore. The cap is 0.25% x Rs 400 crore = Rs 1 crore. If incidental profits are Rs 1.4 crore, Rs 0.4 crore (Rs 40 lakh) is the excess and is taxed under the normal provisions.

Income from a ship that is not a qualifying ship is computed under the normal provisions (section 228(8)). Goods or services moved between the tonnage business and another business of the same company are valued at market value (section 228(9)), and the Assessing Officer can adjust profits from arrangements with closely connected persons (section 228(12)).

How does a company opt in, and for how long?

A qualifying company applies to the Joint Commissioner having jurisdiction over it, in Form No. 80 (section 231(1), Rule 146(a)). The same form is used to renew the option.

Item	Rule
Who decides	Joint Commissioner, by written order approving or refusing (section 231(4))
When to apply	Within 3 months of incorporation, or of first becoming a qualifying company (section 231(2)). An IFSC unit that took the section 147 deduction can apply within 3 months of that deduction ceasing (section 231(3))
Time to decide	Before 3 months from the end of the quarter in which the application was received (section 231(6))
Hearing before refusal	Reasonable opportunity of being heard is required (section 231(5))
Applies from	The tax year in which the option is exercised (section 231(7))
Validity	10 years from the date the option is exercised (section 231(8))
Renewal	Within 1 year from the end of the tax year in which the option ceases (section 231(10))

What conditions must a tonnage tax company keep meeting?

Section 232 makes the option conditional. A breach can switch off the option for a year or end it.

Condition	Requirement	Consequence of failure
Tonnage Tax Reserve Account (232(1))	Credit 20% or more of the book profit from core and incidental activities each tax year	Proportionate income taxed normally (232(9)); option ceases after 2 consecutive years of failure (232(10))
Use of reserve (232(6))	Within 8 years, buy a new ship or inland vessel; until then, no dividends or profit distribution, no remittance abroad, no assets created outside India	Proportionate amount taxable (232(7))
Charter-in cap (232(15))	Not more than 49% of net tonnage chartered in (bareboat charter-cum-demise is excluded)	That year's income computed without the scheme (232(18)); option ceases after 2 consecutive years (232(19))
Training (232(12), (13))	Meet the minimum training requirement and file the Director-General of Shipping or designated authority certificate with the return under section 263	Option ceases after 5 consecutive years of failure (232(14))
Books and audit (232(21))	Separate books for the shipping business and an accountant's report in Form No. 81 before the specified date in section 63 (Rule 146(e))	Option has no effect for that year

How does the 20% reserve work?

"Book profit" here has the meaning in section 206(1)(c), limited to income from the core and incidental activities (section 232(2)). If the company has a shipping book profit but book losses elsewhere and cannot fund the reserve, it creates what it can and the shortfall moves to the next year's requirement (section 232(3)). That relief does not extend to a second year in a row (section 232(5)).

Example 4: a reserve shortfall. Assume book profit from core and incidental activities of Rs 10 crore and relevant shipping income of Rs 10 crore for the year.

Step	Working	Result
1. Minimum reserve	20% x Rs 10 crore	Rs 2 crore
2. Amount actually credited	Assumed	Rs 1.5 crore
3. Shortfall	2 - 1.5	Rs 0.5 crore
4. Shortfall proportion	0.5 / 2	25%
5. Income taxed under normal provisions	25% x Rs 10 crore (section 232(9))	Rs 2.5 crore

The reserve must also be used on a new ship within 8 years. If it is used for another purpose, or not used on a new ship, or the ship is sold within 3 years of the end of the year of acquisition (other than in a demerger), a proportionate amount of that year's relevant shipping income becomes taxable under the normal provisions (section 232(7)), reduced by the proportionate tonnage income already charged in the year the reserve was created (section 232(8)).

How is the 49% charter-in limit measured?

Rule 146(d) measures it in ton days: total chartered-in ton days divided by total ton days operated by the company, for the tax year (section 232(16) uses the average net tonnage over the year).

Example 5: charter-in test. Assume a company owns ships of 30,000 net tons and charters in 20,000 net tons, all for the full year. Chartered-in share = 20,000 / 50,000 = 40%, within the cap. If it had chartered in 30,000 net tons instead, the share would be 30,000 / 60,000 = 50%, above 49%. That year's shipping income would be computed under the normal provisions, and a second consecutive breach ends the option.

How are losses, depreciation and deductions treated?

Section 230 removes the usual levers while the company is under the scheme:

• Losses, allowances and deductions relating to the tonnage tax years are treated as already given effect to in each year itself (section 230(1)(a)).
• Shipping business losses of the scheme years cannot be carried forward or set off (section 230(1)(b)).
• No Chapter VIII deduction is allowed on profits of operating qualifying ships (section 230(1)(c)).
• Depreciation written down values are computed as if depreciation had been claimed and allowed in those years (section 230(1)(d)).
• Losses from before the option are dealt with as if set off against relevant shipping income in the scheme years, and cannot be set off against other income from the year the option is exercised (section 230(2), (3)).

Section 229 sets up a separate block of "qualifying assets" for ships. On the first day of the first tax year, the written down value of the ship block is split between qualifying and other ships in the ratio of their book written down values. Gains on transfer of a qualifying asset are charged under sections 67 and 74, with section 74 read as referring to the written down value of the block of qualifying assets (section 229(8), (9)). Book profit or loss from tonnage tax activities is excluded from book profit under section 206(1)(c) (section 228(16)); the minimum alternate tax guide covers that section.

What happens on an amalgamation or demerger?

• Amalgamation: the scheme applies to the amalgamated company if it is a qualifying company. If it is not already a tonnage tax company, it must opt within 3 months of the approval of the amalgamation scheme (section 233(1), (2)).
• If the amalgamating companies are all tonnage tax companies, the option with the longest unexpired period governs (section 233(3)).
• Demerger: the scheme applies to the resulting company for the unexpired period if it is a qualifying company, and the demerged company's option continues for the unexpired period if it stays qualifying (section 233(5), (6)).

When can the Assessing Officer exclude a company from the scheme?

Section 234 allows exclusion if the company is party to a transaction that abuses the scheme, meaning it gives a tax advantage to someone other than the tonnage tax company, or to the company in respect of its non-tonnage activities. The Assessing Officer must issue a show-cause notice and get prior approval of the Principal Chief Commissioner or Chief Commissioner before passing the order (section 234(5)). If the company shows the transaction was a bona fide commercial transaction not entered into to get a tax advantage, the section does not apply (section 234(6)). An exclusion order ends the option from the first day of the tax year in which the transaction was entered into (section 234(7)).

Real-life examples

Meena's coastal cargo company. Meena runs an Indian company that owns three coastal cargo ships and manages operations from Mumbai. Its main object is operating ships, so it meets the qualifying company definition. It files Form 80 within three months of becoming a qualifying company. Once approved, its shipping income is the tonnage figure for each ship, whether the year is a record one or a poor one.

Ravi's charter-heavy fleet. Ravi's company owns 20,000 net tons and charters in 21,000 net tons on time charters, all year. The chartered-in share is 21,000 / 41,000, which is about 51%. That is above 49%, so the year's income is computed without the scheme (section 232(18)). If the same happens the next year, the option ceases from the following year (section 232(19)). To stay inside the limit he would need to own more or charter in less, or use bareboat charter-cum-demise, which is excluded from "chartered in" (section 232(20)).

Is the tonnage tax scheme better than normal taxation?

The scheme is optional (section 225), so the choice is a trade-off. Because tonnage income is fixed by net tonnage and days operated, a profitable year does not raise it and a loss year does not lower it (section 228(13)). The price is that the shipping losses of the scheme years cannot be carried forward or set off (section 230(1)(b)), no Chapter VIII deduction is available on the shipping profits (section 230(1)(c)), and the company must meet the reserve, charter-in, training and Form 81 conditions of section 232. A company with steady, high margins on a modern fleet may find the fixed figure attractive. A company with frequent losses or heavy chartering may not, so model both positions before filing Form 80.

Common mistakes

• Treating the 20% reserve as optional. Failing it for two consecutive years ends the option, and a shortfall in any year pushes part of the income into normal tax.
• Forgetting rounding. The slab is applied to tonnage rounded to the nearest 100 tons, not the raw certificate figure.
• Counting days wrongly. N is the days the ship was operated as a qualifying ship, not the days owned. A temporary pause in operating does not count as cessation (section 232(22)), but a ship that temporarily stops being a qualifying ship is not treated as one (section 232(23)).
• Ignoring the training certificate. The certificate has to go with the return of income each year (section 232(13)).
• Missing Form 81. Without the accountant's report and separate books, the option has no effect for that year (section 232(21)).
• Assuming an opt-out is reversible. A company that opts out, defaults, or is excluded cannot opt again for ten years (section 231(12)).

Quick reference: key limits and dates

Item	Figure	Where
Minimum net tonnage of a qualifying ship	15	235(i)
Application window	3 months from incorporation or first qualification	231(2)
Application form / audit report form	Form 80 / Form 81	Rule 146(a), (e)
Option validity	10 years	231(8)
Renewal window	1 year from end of tax year of cessation	231(10)
Bar after opt-out, default or exclusion	10 years	231(12)
Reserve	20% or more of book profit; use within 8 years	232(1), (6)
Chartered-in tonnage cap	49% of net tonnage	232(15)
Incidental income cap	0.25% of core turnover	228(2)

Where this is in the Act

• Section 225: option to compute shipping income under this Part
• Section 226: the scheme, separate business, deemed profits
• Section 227: tonnage income formula, slabs, rounding, certificates
• Section 228: relevant shipping income, core and incidental activities, book profit exclusion
• Section 229: depreciation block and capital gains
• Section 230: exclusion of deductions, losses and set-off
• Section 231: opting in, validity, renewal, cessation
• Section 232: reserve, training, charter-in cap, books and audit
• Section 233: amalgamation and demerger
• Section 234: avoidance and exclusion
• Section 235: definitions
• Rule 146: Form 80, deemed tonnage, incidental activities, charter-in computation, Form 81

How do CA firms keep track of tonnage tax compliance?

For a CA firm serving a shipping client, the hard part is the calendar: the opt-in window, the yearly reserve check, the training certificate, the Form 81 report and the 10-year option end date. Finexo's practice management software can hold these as recurring tasks and deadlines per client and remind your team before they pass. It does not compute tonnage income or file forms for you.

This article explains the Income-tax Act, 2025 (as amended by the Finance Act, 2026) and the Income-tax Rules, 2026. It is general information, not tax advice. Confirm the position for a specific case with a qualified chartered accountant.