Chapter XIII - Determination of Tax in Special Cases
Section 232
Section 232: conditions for staying eligible under the tonnage tax scheme
Having opted into the tonnage tax scheme under Section 231, a company must keep meeting ongoing conditions: creating a minimum reserve, using it for a new ship or inland vessel within the statutory period while observing the interim-use restrictions, meeting training requirements, staying under a chartered-in tonnage limit, and maintaining separate books. The consequences of a failure depend on the condition breached.
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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) 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).
(2) For the purposes of this section, the expression “book profit” shall have the meaning assigned to it in section 206(1)(c) so far as it relates to the income derived from the activities referred to in section 228(1)(a) and (b).
(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.
(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.
(5) For the purposes of sub-section (3), 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.
(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.
(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 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.
(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.
(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.
(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.
(11) For the purposes of this section, the expression “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.
(12) A tonnage tax company, after its option has been approved under section 231(4), shall comply with the minimum training requirement as per the guidelines issued by the Director-General of Shipping or the Inland Waterways Authority of India, as the case may be, and notified by the Central Government.
(13) The tonnage tax company shall be required to furnish a copy of the certificate issued by the Director-General of Shipping, or the designated authority, as appointed by the respective State Governments under the Inland Vessels Act, 2021 (24 of 2021), as the case may be, 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.
(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.
(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.
(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.
(17) For the purposes of sub-section (16), the average of net tonnage shall be computed in such manner, as may be prescribed, in consultation with the Director- General of Shipping or Inland Waterways Authority of India, as the case may be.
(18) Where the net tonnage of ships or 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.
(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.
(20) For the purposes of this section, the expression “chartered in” shall exclude a ship or inland vessel, as the case may be, chartered in by the company on bareboat charter-cum-demise terms.
(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 section 63, the report of an accountant, in the prescribed form, duly signed and verified by such accountant.
(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 of the Chapter.
(23) Where a qualifying company continues to operate a ship or inland vessel, as the case may be, which temporarily ceases to be a qualifying ship, such ship or inland vessel, as the case may be, shall not be deemed as a qualifying ship for the purposes of this Part.
Introduction
A company using the tonnage-tax scheme must maintain and use the statutory reserve as section 232 requires.
Incorrect use or failure to use the reserve within the prescribed period can bring an amount back into taxable income.
Key takeaways
Reserve-account contribution
A tonnage-tax company must credit at least 20% of qualifying book profit to its Tonnage Tax Reserve Account.
Invest within the stated period
The reserve must be used for a qualifying new ship or inland vessel within eight years after the tax year of credit.
Misuse can end the benefit
Failure to make, use or retain the reserve as required triggers the section’s tax consequences and may affect the scheme option.
Training proof travels with the return
Finance Act 2026 requires compliance with notified minimum-training guidelines and a specified authority’s certificate to be furnished with the section 263 return.
The Tonnage Tax Reserve Account
A tonnage tax company must credit to a "Tonnage Tax Reserve Account" an amount of 20% or more of the book profit derived from its core and incidental tonnage tax activities each tax year, for use as described below.
"Book profit" for this purpose has the meaning given in Section 206(1)(c), so far as it relates to income from those activities.
Where book profit from operating qualifying ships is offset by book loss from other sources so that the full reserve cannot be created, subsection (3) requires creation to the extent possible and adds the shortfall to the following tax year’s reserve requirement. Subsection (4) treats that carried-forward shortfall as sufficient reserve for the first year. If the shortfall continues for two consecutive tax years, subsection (5) removes that deemed-sufficient-reserve treatment for the second year; it does not expressly remove subsection (3)’s carry-forward mechanism.
How the reserve must be used
Amounts credited to the Tonnage Tax Reserve Account must be utilised before the expiry of eight years following the tax year of credit to acquire a new ship or new inland vessel for the company's business. Until acquisition, the reserve may be used for the business of operating qualifying ships, but not for distribution as dividends or profits, remittance outside India as profits, or creating any asset outside India (Section 232(6)).
Consequences of misuse or non-utilisation
If the reserve is used outside the purposes permitted by Section 232(6), is not used for the required acquisition within the eight-year period, or funds a ship or inland vessel sold or transferred (other than in a demerger) before three years expire from the end of its acquisition tax year, a proportionate amount of the relevant shipping income becomes taxable under the other provisions. The taxable year depends on the trigger: misuse year, the year immediately following the eight-year period, or sale/transfer year. The amount is reduced by the proportionate tonnage income already taxed in the reserve-creation year. Permitted interim business use under subsection (6)(b) is not itself misuse.
Similarly, if the amount actually credited to the reserve falls short of the required 20% minimum, a proportionate part of relevant shipping income for that year is taxed outside the tonnage tax scheme.
If the required reserve is not created for any two consecutive tax years, the tonnage tax option ceases from the beginning of the tax year following the second consecutive year of failure.
Training, audit records and temporary interruptions
The notified minimum-training guidelines come from the Director-General of Shipping or Inland Waterways Authority of India, as applicable. The required certificate must accompany the section 263 return. Failure for five consecutive tax years ends the option from the beginning of the following tax year.
Separate books for operating qualifying ships and an accountant’s report furnished before the section 63 specified date are required for the option to operate in a tax year. A temporary cessation of ship operations is treated differently from a ship temporarily losing its qualifying status: the latter is not a qualifying ship during that period.
Step-by-step flow for the conditions in Section 232
- 1
Credit the Tonnage Tax Reserve Account
Credit at least 20% of the book profit from the activities in Section 228(1)(a) and (b) each tax year (Section 232(1)). Book profit has the Section 206(1)(c) meaning so far as it relates to those activities (Section 232(2)).
- 2
Is the reserve short?
- Short because of a book loss from other sources: Create what is possible and add the shortfall to next year's requirement (Section 232(3) and (4)). If the shortfall continues for two consecutive years, Section 232(4) does not protect the second year (Section 232(5)).
- Short for another reason: A proportionate part of relevant shipping income is taxed outside the scheme (Section 232(9)). If the reserve is not created for two consecutive years, the option ends (Section 232(10)).
- Not short: Go to the next step.
- 3
Use the reserve within eight years
Use it to acquire a new ship or inland vessel, and until then for the qualifying ship business. It cannot be used for dividends, remitting profits outside India or creating assets outside India (Section 232(6)). Misuse, non-use, or sale of the new ship within three years brings a proportionate amount to tax (Section 232(7) and (8)).
- 4
Meet the training and charter-in limits
Comply with the minimum training requirement and file the certificate with the return under Section 263 (Section 232(12) and (13)). Not more than 49% of net tonnage, by yearly average, may be chartered in (Section 232(15) and (16)). If the limit is exceeded, that year is computed without the scheme (Section 232(18)); two consecutive years end the option (Section 232(19)).
- 5
Keep separate books and an accountant's report
The option has no effect for a tax year unless separate books are kept for the qualifying ship business and the accountant's report is furnished before the specified date in Section 63 (Section 232(21)).
Practical checklist
Do
- Track reserve credits by tax year and the statutory utilisation window.
- Document qualifying ship acquisition or other permitted uses of the reserve.
Avoid
- Use the reserve for ordinary distributions or unrelated assets without checking the section.
Illustrative example
Worked example: a reserve shortfall and the charter-in limit
Hypothetical facts (illustration only, not a real taxpayer): A tonnage tax company has book profit of ₹50 crore from the activities in Section 228(1)(a) and (b) and relevant shipping income of ₹60 crore for the tax year. It has no book loss from other sources, and it credits only ₹6 crore to the Tonnage Tax Reserve Account. Its average net tonnage operated is 1,00,000 tons, of which 45,000 tons are chartered in. All amounts and tonnages are assumed; the 20% and 49% limits are from Section 232.
Minimum reserve
20% × ₹50 crore = ₹10 crore.
Shortfall
₹10 crore − ₹6 crore = ₹4 crore. Section 232(3) does not help, because there is no book loss from other sources.
Amount taken out of the scheme
Under Section 232(9): ₹60 crore × ₹4 crore / ₹10 crore = ₹24 crore of relevant shipping income is taxed under the other provisions of the Act.
Charter-in limit
45,000 / 1,00,000 = 45%, which is within the 49% limit in Section 232(15).
Next year
If the reserve is again not created next year, the option will cease from the beginning of the following tax year (Section 232(10)).
Outcome
- ₹24 crore of relevant shipping income is taxed outside the tonnage tax scheme for the year.
- The charter-in condition is met; the method for averaging net tonnage is prescribed by rules.
Frequently asked questions
What percentage of book profit must go into the Tonnage Tax Reserve?
20% or more of the book profit derived from the company's core and incidental tonnage tax activities each tax year.
How long does the company have to use the reserve to buy a new ship?
Eight years from the end of the tax year in which the amount was credited to the Tonnage Tax Reserve Account.
Is there a limit on how much tonnage a tonnage tax company can charter in from others?
Yes. Section 232(15) caps chartered-in net tonnage (excluding bareboat charter-cum-demise arrangements) at 49% of the net tonnage of qualifying ships operated during the tax year, calculated on an average basis. Under Section 232(18), exceeding the cap means the option does not apply for that tax year; exceeding it for two consecutive tax years ends the option from the following tax year under Section 232(19).
What other conditions apply to keep the option in force?
The company must maintain separate books for its qualifying-ship business and furnish an accountant's report before the specified date. It must also comply with the minimum training requirement under guidelines issued by the Director-General of Shipping or Inland Waterways Authority of India, as applicable, and notified by the Central Government. A certificate from the Director-General of Shipping or the designated authority appointed by the relevant State Government under the Inland Vessels Act, 2021, as applicable, must accompany its return.
Need help applying this provision to your situation?
Talk to our tax team about tonnage tax scheme complianceLast updated 10 October 2026