Chapter XIII - Determination of Tax in Special Cases
Section 226
Section 226: the tonnage tax scheme
Section 226 sets out the operating mechanics of the tonnage tax scheme introduced by Section 225 - what it means for a company to "operate" a ship or inland vessel, why the tonnage tax business is treated as a business separate from everything else the company does, and what happens once a company opts into the scheme.
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This article is for general information. Refer to the Income-tax Act, 2025 as amended by the Finance Act, 2026 and the Taxation and Other Laws (Amendment) Act, 2026 for the official provisions. If you need professional advice for your situation, contact Bizeneed.
Statutory text
Bare law
(1) In this Part, a company shall—
(a) be regarded as operating a ship or inland vessel, as the case may be, if it operates any ship or inland vessel, as the case may be, whether owned or chartered by it and includes a case where even a part of the ship or inland vessel, as the case may be, has been chartered in by it in an arrangement such as slot charter, space charter or joint charter;
(b) not be regarded as operating a ship or inland vessel, as the case may be, which has been chartered out by it on bareboat charter-cum-demise terms or on bareboat charter terms for a period exceeding three years.
(2) A tonnage tax company engaged in the business of operating qualifying ships shall compute the profits from such business under the tonnage tax scheme.
(3) The tonnage tax business shall be considered as a separate business distinct from all other activities or business carried on by the company.
(4) The profits referred to in sub-section (2) shall be computed separately from the profits and gains from any other business.
(5) The tonnage tax scheme shall apply only if an option to that effect is made as per section 231.
(6) Where a company engaged in the business of operating qualifying ships,––
(a) is not covered under the tonnage tax scheme; or
(b) has not made an option in respect of the tonnage tax scheme as per section 231, the profits and gains of such company from such business shall be computed as per other provisions of this Act.
(7) Subject to the other provisions of this Part,––
(a) the tonnage income, shall be––
(i) computed as per section 227; and
(ii) deemed to be the profits chargeable under the head “Profits and gains of business or profession”; and
(b) the relevant shipping income referred to in section 228(1) shall not be chargeable to tax.
Introduction
Once a qualifying company opts into tonnage tax, income from qualifying ships is computed under the scheme rather than the ordinary business-income rules. The tonnage-tax business is kept distinct from its other activities.
Key takeaways
Option is necessary
Operating qualifying ships alone does not start tonnage taxation; the company must opt under section 231.
Separate business computation
The qualifying shipping business is treated separately from the company’s other businesses.
Tonnage income is deemed profit
Once the scheme applies, income computed under section 227 is treated as taxable business profit.
What counts as "operating" a ship
A company is treated as operating a ship or inland vessel if it operates any ship or inland vessel, whether owned or chartered by it - including where it has chartered in only part of the ship or inland vessel, such as under a slot charter, space charter or joint charter arrangement.
A company is not treated as operating a ship or inland vessel that it has chartered out on bareboat charter-cum-demise terms, or on bareboat charter terms for a period exceeding three years.
Separate business treatment
A tonnage tax company engaged in operating qualifying ships computes the profits from that business under the tonnage tax scheme, and the tonnage tax business is treated as a business distinct from all the company's other activities or businesses. Its profits are computed separately from profits and gains of any other business.
The scheme only applies if opted for
The tonnage tax scheme applies only if the company has made an option to that effect under Section 231. If a company operating qualifying ships is not covered by the scheme, or has not exercised the option, its profits from that business are computed under the Act's other provisions in the ordinary way.
Effect once opted in
Once the scheme applies, the tonnage income (computed under Section 227) is deemed to be profits chargeable under the head "Profits and gains of business or profession", while the "relevant shipping income" referred to in Section 228(1) is not chargeable to tax.
Step-by-step flow for applying Section 226
- 1
Is the company operating the ship or inland vessel?
It operates a ship it owns or charters, including where only part is chartered in, such as a slot, space or joint charter (Section 226(1)(a)). It does not operate a ship chartered out on bareboat charter-cum-demise or bareboat charter terms for more than three years (Section 226(1)(b)).
- 2
Is the company covered by the scheme and has it opted under Section 231?
- No: Profits from operating qualifying ships are computed under the other provisions of the Act (Section 226(5) and (6)).
- Yes: Go to the next step.
- 3
Treat the tonnage tax business as separate
It is a separate business distinct from the company's other activities (Section 226(3)), and its profits are computed separately (Section 226(4)).
- 4
Compute the tonnage income
Tonnage income is computed under Section 227 and deemed profits under the head "Profits and gains of business or profession" (Section 226(7)(a)).
- 5
Exclude the relevant shipping income
The relevant shipping income under Section 228(1) is not chargeable to tax (Section 226(7)(b)).
Practical checklist
Do
- Confirm the company exercised a valid option under section 231 before using tonnage income.
- Keep qualifying shipping activity and other business activity separate in the computation.
Avoid
- Use tonnage tax simply because a vessel is owned or chartered.
Illustrative example
Worked example: which ships are operated
Hypothetical facts (illustration only, not a real taxpayer): Neel Shipping Ltd. has opted for the tonnage tax scheme under Section 231. It owns qualifying ship A and runs it. It takes slots on ship B under a slot charter. It has chartered out qualifying ship C on bareboat charter terms for five years. All facts are assumed.
Ship A
An owned ship that the company runs is operated by it (Section 226(1)(a)).
Ship B
A slot charter is a part charter-in, which Section 226(1)(a) expressly includes, so the company operates ship B to that extent.
Ship C
A bareboat charter-out for five years exceeds three years, so the company is not regarded as operating ship C (Section 226(1)(b)).
Computation
Tonnage income for the ships it operates is computed under Section 227 as a separate business. The relevant shipping income under Section 228(1) is not chargeable.
Outcome
- Ships A and B are inside the tonnage tax business; ship C is not.
- The income from ship C must be dealt with under the other provisions of the Act.
Frequently asked questions
Does chartering out a ship long-term still count as "operating" it?
No. A company is not treated as operating a ship it has chartered out on bareboat charter-cum-demise terms, or on ordinary bareboat charter terms for more than three years.
What if a company operates qualifying ships but never opts for the scheme?
Its profits from that business are then computed under the Act's other (ordinary) provisions, not under the tonnage tax rules.
Need help applying this provision to your situation?
Talk to our tax team about the tonnage tax schemeLast updated 9 October 2026