Section 226 · Special cases
Section 226 of the Income-tax Act, 2025 — Tonnage Tax Scheme for Shipping Companies
By CA Rajat Agrawal
Updated 04 Jul 2026
Chapter XIII
📜 What the law says — Section 226, Income-tax Act 2025
226. (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.
Computation of tonnage income.
In plain language
What Section 226 actually says
Section 226 of the Income-tax Act, 2025 is the foundation stone of the Tonnage Tax Scheme (TTS) — a special, optional way for Indian shipping companies to be taxed. Instead of paying tax on their actual book profits from running ships, an eligible company can choose to pay tax on a notional (deemed) income calculated purely from the tonnage (carrying capacity) of its ships. This deemed figure is called "tonnage income" and is worked out under Section 227.
- Deemed business profit: The tonnage income is treated as "profits and gains of business or profession" and charged to tax accordingly.
- Separate business: The tonnage tax business is treated as a business distinct and separate from all other activities the company carries on. Books, income and losses of shipping must be ring-fenced.
- Relevant shipping income excluded: Once tonnage income is computed, the "relevant shipping income" (defined in Section 228) is not taxed again under the normal provisions.
- Purely optional: The scheme applies only if the company exercises the option in the manner laid down in Section 231. If no option is made, the shipping profits are computed normally under the regular provisions of the Act.
In plain terms: a shipping company can lock in a small, predictable, tonnage-based tax bill instead of a variable tax on real profits. This is the 2025 Act's re-write of the old Chapter XII-G (Sections 115V to 115VZC) of the Income-tax Act, 1961. Section 226 corresponds to the old Sections 115VA and 115VB.
Who can use it — and what "operating a qualifying ship" means
- The taxpayer must be a company (an Indian company managed and controlled in India — a "qualifying company").
- It must own or charter at least one qualifying ship (and the 2025 Act extends the concept to inland vessels).
- A company is regarded as "operating" a ship whether the ship is owned or chartered by it (subject to limits on chartered-in tonnage under later sections).
Key conditions and limits to remember
- 10-year lock-in: Once opted, the scheme stays in force for 10 years. Opting out or being expelled generally bars re-entry for a further 10 years.
- Tonnage Tax Reserve: The company must transfer a prescribed minimum (broadly 20% of book profit from the tonnage business) to a reserve account, to be used within 8 years to acquire new ships.
- Training obligation: Minimum officer/crew training standards set by the Director-General of Shipping must be met; failure over consecutive years can lead to exit.
- No double dip: No further deduction, loss set-off or depreciation of tonnage assets is allowed against the deemed income (see Section 230); the deemed income already accounts for everything.
How Section 226 interacts with related sections
Section 226 is the gateway; the machinery lives in the sections that follow. Section 227 gives the daily tonnage-income rate slabs and the formula. Section 228 defines "relevant shipping income" that escapes normal tax. Section 229 deals with depreciation and capital gains on tonnage assets. Section 230 blocks deductions, losses and set-offs. Section 231 is the actual opt-in mechanism (application within 3 months of becoming a qualifying company, using the prescribed form). Section 232 lists continuing conditions, and Sections 233-234 handle amalgamation/demerger and anti-avoidance/expulsion.
Practical implications
- The scheme is a huge simplification and usually a very low effective tax rate for large fleets — the deemed income is tiny compared with real profits in good years.
- But it is a double-edged sword: in a loss-making year you still pay tax on notional tonnage income, and you cannot claim actual losses of the shipping business.
- Tonnage income is added to any non-shipping income of the company, which is taxed normally at the applicable corporate rate.
- Because of the 10-year commitment and reserve/training conditions, opting in is a strategic finance decision, not a year-to-year choice.
💡 Example
Worked example 1 — one ship for a full year. Suppose Sagar Shipping Ltd owns one qualifying ship of 28,000 net tons operated for all 365 days. Using the Section 227 slabs, the daily tonnage income is built up slab by slab: first 1,000 tons = ₹700; next 9,000 tons (1,001-10,000) = 90 × ₹53 = ₹4,770; next 15,000 tons (10,001-25,000) = 150 × ₹42 = ₹6,300; remaining 3,000 tons (above 25,000) = 30 × ₹29 = ₹870. Daily tonnage income = 700 + 4,770 + 6,300 + 870 = ₹12,640 per day. Annual tonnage income = ₹12,640 × 365 = ₹46,13,600. Even if the ship actually earned ₹40 crore profit, tax is charged only on roughly ₹46.1 lakh of deemed income.
Worked example 2 — a smaller vessel. Take a 6,000-ton ship run for 200 days. Daily tonnage income = ₹700 (first 1,000 tons) + 50 × ₹53 (next 5,000 tons) = 700 + 2,650 = ₹3,350/day. Tonnage income = ₹3,350 × 200 = ₹6,70,000, on which normal corporate tax then applies.
A relatable story. Meera, CFO of a mid-size shipping firm, was tired of wild swings — one year huge profits and a big tax bill, the next year a loss she could not fully use. She opted into the tonnage tax scheme under Section 231. Now her shipping tax is predictable and low, tied only to her fleet's tonnage. The trade-off she accepted: a 10-year lock-in, parking 20% of book profit into a reserve for buying new ships, and meeting seafarer training norms. For a growing fleet, she found the certainty well worth it.
| Net tonnage of the qualifying ship | Daily tonnage income (Section 227) |
|---|
| Up to 1,000 tons | ₹70 for each 100 tons |
| Exceeding 1,000 up to 10,000 tons | ₹700 + ₹53 for each 100 tons above 1,000 |
| Exceeding 10,000 up to 25,000 tons | ₹5,470 + ₹42 for each 100 tons above 10,000 |
| Exceeding 25,000 tons | ₹11,770 + ₹29 for each 100 tons above 25,000 |
| Formula: Tonnage Income = Daily Tonnage Income × Number of days the ship operated as a qualifying ship in the year |
Related sections
Section 227 — Computation of tonnage income (daily rate slabs) Section 228 — Relevant shipping income excluded from normal tax Section 230 — No deduction, loss or set-off against tonnage income Section 231 — Method of opting into the tonnage tax scheme and validity Section 232 — Conditions for continued applicability of the scheme Section 234 — Anti-avoidance and exclusion from the tonnage tax scheme
Frequently asked questions
Is the tonnage tax scheme compulsory for shipping companies?
No. Section 226 makes it purely optional. It applies only if the qualifying company exercises the option under Section 231; otherwise its shipping profits are taxed normally under the regular provisions of the Act.
Which old law does Section 226 replace?
It replaces the framework of the old Chapter XII-G (Sections 115V to 115VZC) of the Income-tax Act, 1961. Section 226 broadly corresponds to Sections 115VA and 115VB of the 1961 Act.
How long am I locked into the scheme once I opt in?
The scheme applies for 10 years from the option. Exiting early or being expelled generally means you cannot re-enter the scheme for another 10 years, so the decision is long-term.
Do I still pay tax if my ships made a loss this year?
Yes. Tonnage income is a deemed, notional figure based on tonnage and days operated, not on actual profit. You pay tax on it even in a loss year, and you cannot set off the shipping business loss.
Can I claim depreciation and expenses on my ships under this scheme?
No. The deemed tonnage income is treated as already covering everything. Section 230 blocks separate deductions, losses, set-off and depreciation of tonnage assets against this income.
Does the scheme cover chartered ships and inland vessels?
Yes. A company is treated as operating a ship whether it owns or charters it (within prescribed chartered-in limits), and the 2025 Act extends the concept to qualifying inland vessels.
What extra obligations come with opting in?
You must transfer a prescribed minimum (broadly 20% of book profit) to a Tonnage Tax Reserve for buying new ships within 8 years, and meet minimum seafarer training standards set by the Director-General of Shipping.
C
CA Rajat Agrawal
Chartered Accountant, EaseValue · Reviewed 04 Jul 2026
This explainer is prepared and reviewed by EaseValue's tax team, based on the text of the Income-tax Act, 2025 (as amended by the Finance Act, 2026).
Disclaimer: This page explains the law in general terms for education and is not professional advice. The Income-tax Act, 2025 takes effect from 1 April 2026; provisions, thresholds and interpretations may change. Please confirm your specific position with our team before acting.
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