Section 225 of the Income-tax Act, 2025 — Income from Operating Qualifying Ships (Tonnage Tax Scheme)

In plain language

What Section 225 actually says

Section 225 is the gateway provision of the Tonnage Tax Scheme — a special, optional way for Indian shipping companies to compute the income they earn from operating "qualifying ships". It sits at the head of a group of sections (roughly Sections 225 to 232) that together replace Chapter XII-G (Sections 115V to 115VZC) of the old Income-tax Act, 1961. The 2025 Act takes effect from 1 April 2026.

In plain words, Section 225 provides that, notwithstanding anything in Sections 26 to 54 (the normal "Profits and gains of business or profession" computation rules), a company engaged in the business of operating qualifying ships may — at its option — compute that income under the tonnage tax provisions, and such income is then deemed to be profits and gains of business chargeable under the head "Profits and gains of business or profession".

Why it exists — presumptive tax on tonnage, not on profit

• Normal rule: Companies pay tax on actual accounting profits.
• Tonnage tax rule: A shipping company instead pays tax on a notional (deemed) income calculated purely from the net tonnage (carrying capacity) of each ship, multiplied by fixed daily rates and the number of days operated — regardless of whether the ship actually made a large profit or a loss.
• The deemed income is then taxed at the company's normal corporate tax rate. Because shipping is capital-intensive and cyclical, this gives certainty and a globally competitive low effective tax, encouraging ships to fly the Indian flag.

Who can use it

• Only companies — not individuals, firms or LLPs — can opt in. It must be a "qualifying company" (broadly: an Indian company, with its place of effective management in India, that owns at least one qualifying ship and carries on the business of operating ships).
• The vessel must be a qualifying ship — a sea-going ship of 15 net tonnes or more, registered under the Merchant Shipping Act (or a specified certificate), and not among excluded categories (such as fishing vessels, pleasure craft, harbour/river ferries, offshore installations, etc.).
• The Finance Act framework has extended tonnage tax benefits to inland vessels registered under the Inland Vessels Act, 2021, with effect from AY 2026-27.

Key conditions and limits (Sections 226-232)

• It is optional and locks you in: the company must apply (historically in Form 80) and, once approved, the scheme applies for a 10-year block.
• Chartered-in cap: not more than 49% of net tonnage operated in any year may be chartered-in ships (the rest must be owned or bareboat).
• Tonnage Tax Reserve: the company must transfer at least 20% of book profits from shipping to a reserve and use it to acquire a new ship within 8 years. Failure to create the reserve for two consecutive years causes the scheme to cease.
• Ring-fencing: tonnage income is a separate business. You cannot set off other losses against it, and no further deductions/depreciation are allowed against the deemed income (depreciation on ships is still tracked on a notional block for exit purposes).

Interaction with other provisions

• Section 225 overrides Sections 26 to 54 for the qualifying-ship income only. All non-shipping income is taxed normally.
• Related sections cover the tonnage tax scheme itself, the computation of tonnage income, exclusion of loss set-off, treatment of capital gains on sale of qualifying ships, and conditions for continued applicability.
• Because income is presumptive, most Chapter VI-A deductions and MAT interplay are restricted for the shipping stream.

Practical implications

• Great for profitable, high-capacity fleets: the deemed income is usually far below real profit, so tax is low.
• Bad in a loss year: you still pay tax on notional tonnage income and cannot claim the loss.
• It is a one-way commitment for the block — model it carefully before opting.