Tonnage tax scheme
[As per the Income Tax Act, 2025 (this Act) w.e.f. 1st April, 2026.]
Section 226(1) of Income Tax Act 2025
(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 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; and
(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.
Section 226(2) of Income Tax Act 2025
(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.
Section 226(3) of Income Tax Act 2025
(3) The tonnage tax business shall be considered as a separate business distinct from all other activities or business carried on by the company.
Section 226(4) of Income Tax Act 2025
(4) The profits referred to in sub-section (2) shall be computed separately from the profits and gains from any other business.
Section 226(5) of Income Tax Act 2025
(5) The tonnage tax scheme shall apply only if an option to that effect is made as per section 231.
Section 226(6) of Income Tax Act 2025
(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.
Section 226(7) of Income Tax Act 2025
(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.
Notes on Section 226 of Income Tax Act 2025
| Section Number | Key Provisions | Explanation |
|---|---|---|
| 226(1) | Definition of Operating a Ship or Inland Vessel | – Operates ship (owned/chartered).- Slot charter, space charter, joint charter included.- Excludes ships chartered out on bareboat terms > 3 years. |
| 226(2) | Profit Computation | Profits of qualifying ships to be computed under tonnage tax scheme. |
| 226(3) | Separate Business Consideration | Tonnage tax business considered distinct from other businesses. |
| 226(4) | Separate Profit Computation | Tonnage tax profits computed separately from other businesses. |
| 226(5) | Option Requirement | Tonnage tax scheme applies only if option is made under Section 231. |
| 226(6) | Non-Applicability | If the company is not covered or has not opted for the scheme, profits are computed under normal provisions of the Act. |
| 226(7) | Computation of Tonnage Income | – Tonnage income computed under Section 227.- Treated as profits under “Profits and Gains of Business or Profession”.- Relevant shipping income (Section 228(1)) not chargeable to tax. |
Note: This tabular format highlights key points for easy memorization and quick reference during exam preparation.
FAQs on Tonnage Tax Scheme under Income Tax Act 2025
Q1: What is the Tonnage Tax Scheme?
A1: The Tonnage Tax Scheme is a special taxation regime under Section 226 of the Income Tax Act 2025, applicable to companies engaged in the business of operating qualifying ships. It allows companies to compute profits based on the tonnage of ships rather than conventional income-based taxation.
Q2: Who is eligible to opt for the Tonnage Tax Scheme?
A2: Companies operating qualifying ships, either owned or chartered (including slot charter, space charter, or joint charter), are eligible. However, ships chartered out on bareboat charter-cum-demise terms or bareboat charter for more than three years are not considered as operated by the company.
Q3: How are profits computed under the Tonnage Tax Scheme?
A3: Profits from the business of operating qualifying ships are computed based on tonnage income as per Section 227. These profits are deemed to be chargeable under the head “Profits and gains of business or profession.”
Q4: Can a company have multiple businesses along with the tonnage tax business?
A4: Yes, as per Section 226(3), the tonnage tax business is considered a separate business distinct from any other activities or business carried on by the company.
Q5: Is it mandatory for companies to opt for the Tonnage Tax Scheme?
A5: No, the scheme applies only if the company exercises the option under Section 231 of the Income Tax Act 2025.
Q6: What happens if a company does not opt for the Tonnage Tax Scheme?
A6: If the company does not opt for the scheme or is not eligible, the profits and gains from the business will be computed according to the regular provisions of the Income Tax Act, as per Section 226(6).
Q7: How is the income under the Tonnage Tax Scheme treated for taxation purposes?
A7: The tonnage income is deemed to be the profits chargeable under the head “Profits and gains of business or profession,” while the relevant shipping income under Section 228(1) is not chargeable to tax.
Q8: Is the tonnage tax scheme applicable automatically to all shipping companies?
A8: No, the scheme is not automatic. The company must exercise the option to be governed by the tonnage tax scheme as per Section 231.
Q9: Can a company switch between the tonnage tax scheme and regular income tax provisions?
A9: Once opted, the tonnage tax scheme applies as per the provisions and timelines mentioned in the Act. Specific rules under Section 231 govern the option period and switching between regimes.
Q10: What is the primary benefit of the Tonnage Tax Scheme?
A10: The scheme provides a simplified and predictable method of taxation, potentially reducing the tax burden on shipping companies by linking profits to the ship’s tonnage rather than fluctuating income levels.