Section 232 · Special cases
Section 232 of the Income-tax Act, 2025 — Conditions for Applicability of the Tonnage Tax Scheme (Reserve, Training & Charter-in Limits)
By CA Rajat Agrawal
Updated 04 Jul 2026
Chapter XIII
📜 What the law says — Section 232, Income-tax Act 2025
232. (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 con-
tinues 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-sec-
tion (1),—
(a) has been utilised for any purp
In plain language
What Section 232 is about
Section 232 of the Income-tax Act, 2025 lays down the ongoing conditions a shipping company must keep satisfying to remain inside the tonnage tax scheme. The tonnage tax scheme (Sections 226 to 231) lets a qualifying Indian shipping company pay tax on a notional, fixed income based on the net tonnage of its ships instead of on its actual book profits. Section 232 is the "you can enjoy this concession, but only if you behave" section. It is the 2025 Act's re-enactment of the old Sections 115VT (reserve), 115VU (training) and 115VV (charter-in limit) of the Income-tax Act, 1961. These conditions take effect from 1 April 2026 (tax year 2026-27).
Who it applies to
- Only "tonnage tax companies" — Indian shipping companies whose option under Section 231 has been approved.
- Companies operating qualifying ships, and from 1 April 2026, qualifying inland vessels registered under the Inland Vessels Act, 2021 (extended by the Finance Act, 2026).
- It does not apply to ordinary businesses — this is a niche, sector-specific regime for shipping.
Condition 1 — Tonnage Tax Reserve Account (minimum 20%)
- The company must credit to a "Tonnage Tax Reserve Account" an amount equal to 20% or more of its book profit from core shipping activities (referred to in Section 228) in each tax year.
- The amount must be utilised within 8 years for acquiring new ships/inland vessels or otherwise for the qualifying shipping business — not for dividends, remittances abroad, or creating assets outside India.
- Shortfall rule: If less than 20% is credited, a proportionate slice of the relevant shipping income (in the same ratio as the shortfall bears to the required reserve) is pushed out of the tonnage scheme and taxed normally.
- Two-year rule: If the required reserve is not created for any two consecutive tax years, the tonnage tax option ceases from the beginning of the year following that second year.
Condition 2 — Minimum training of officers
- After approval under Section 231, the company must meet the minimum trainee-officer training requirement laid down in the guidelines of the Director-General of Shipping.
- A compliance certificate must be filed along with the annual income-tax return.
- Five-year rule: If the training requirement is not met for five consecutive tax years, the tonnage tax option ceases from the year following that fifth year.
Condition 3 — Charter-in limit (49% cap)
- Not more than 49% of the net tonnage of the qualifying ships operated during a tax year may be chartered in (i.e. hired from others rather than owned).
- The proportion is worked out on the average net tonnage of all qualifying ships operated in the year.
- Purpose: to ensure the company is a genuine ship owner/operator, not merely a broker or intermediary.
- Two-year rule: if the 49% limit is exceeded in two consecutive tax years, the tonnage tax option ceases from the year following that second year.
How it interacts with related sections
- Section 226 sets up the scheme; Section 227 computes the notional tonnage income; Section 228 defines relevant shipping income (the base for the 20% reserve).
- Section 231 is the doorway (option and validity for 10 years); Section 232 is what keeps the door open.
- Breach of Section 232 conditions can trigger exit/exclusion, after which normal computation and (in some cases) a lock-out from re-opting applies.
Practical implications
- Shipping CFOs must ring-fence 20% of book profit every year and track an 8-year utilisation clock per year's reserve.
- Maintain separate books for qualifying-ship operations and file an accountant's report by the due date.
- Monitor the charter-in ratio continuously — a fleet rebalancing decision can accidentally breach the 49% cap.
- Losing the scheme is expensive: actual profits in a strong shipping market usually far exceed the notional tonnage income.
💡 Example
Example 1 — Reserve shortfall: Oceanic Shipping Ltd earns book profit of ₹100 crore from core shipping activities in FY 2026-27. The minimum Tonnage Tax Reserve is 20% = ₹20 crore. Suppose the company credits only ₹15 crore. The shortfall is ₹5 crore, i.e. 25% of the ₹20 crore required. Accordingly, 25% of that year's relevant shipping income is taken out of the tonnage scheme and taxed under normal provisions at the company rate, while the remaining 75% continues under the concessional tonnage regime. If Oceanic again falls short in FY 2027-28 (two consecutive years), it loses the tonnage tax option entirely from FY 2028-29.
Example 2 — Charter-in breach: Bharat Maritime operates qualifying ships with total average net tonnage of 2,00,000 tons in a year, of which 1,05,000 tons (52.5%) is chartered in. Since this exceeds the 49% cap, that year's benefit is affected. If it crosses 49% again the next year, the tonnage tax option ceases from the following year and Bharat Maritime must revert to regular profit-based assessment.
A relatable story: Think of the tonnage tax scheme like a subsidised toll pass for a shipping company. Section 232 is the fine print on the back of the pass. You must keep a "piggy bank" (the 20% reserve) to buy new ships, keep training young officers, and actually own most of your fleet rather than renting it. Miss the piggy-bank deposit two years running, skip officer training five years, or rent too many ships two years running — and the toll authority cancels your discount pass, sending you back to the full-price lane of normal taxation.
| Condition | Requirement | Consequence of breach | 1961 Act equivalent |
|---|
| Tonnage Tax Reserve | Credit ≥ 20% of book profit each year; use within 8 years for new ships | Proportionate income taxed normally; option ceases if not created for 2 consecutive years | Section 115VT |
| Officer training | Meet Director-General of Shipping training norms; file compliance certificate | Option ceases if not met for 5 consecutive years | Section 115VU |
| Charter-in limit | Chartered-in tonnage ≤ 49% of net tonnage of qualifying ships operated | Year affected; option ceases if exceeded 2 consecutive years | Section 115VV |
| Separate records | Maintain separate books + file accountant's report by due date | May be treated as not opting for the scheme | Section 115VW |
Related sections
Section 226 — Tonnage tax scheme (framework) Section 227 — Computation of tonnage income Section 228 — Relevant shipping income Section 229 — Depreciation and gains on tonnage tax assets Section 231 — Method of opting for tonnage tax scheme and validity Section 233 — Exit, amalgamation and demerger under tonnage tax scheme
Frequently asked questions
How much must be credited to the Tonnage Tax Reserve Account?
At least 20% of the book profit from core qualifying shipping activities must be credited each tax year. The amount has to be utilised within 8 years, mainly for acquiring new ships or inland vessels.
What happens if the reserve is not created?
If less than 20% is credited, a proportionate part of the relevant shipping income is taxed under normal provisions instead of the tonnage scheme. If the reserve is not created for two consecutive years, the tonnage tax option ceases altogether.
What is the 49% charter-in limit?
No more than 49% of the net tonnage of qualifying ships operated in a year may be chartered in (hired) rather than owned. This ensures the company is a genuine ship owner-operator, not merely a broker.
What if a company breaches the charter-in limit?
Breaching 49% affects the benefit for that year, and if the limit is exceeded in two consecutive tax years, the tonnage tax option ceases from the following year and the company reverts to normal profit-based taxation.
Is officer training really a tax condition?
Yes. A tonnage tax company must meet the Director-General of Shipping's minimum trainee-officer training requirements and file a compliance certificate. Failure for five consecutive years ends the scheme.
Does Section 232 now cover inland vessels?
Yes. From 1 April 2026, following the Finance Act 2026 amendments, qualifying inland vessels registered under the Inland Vessels Act, 2021 are brought within the tonnage tax framework and its conditions.
What was the equivalent provision in the old Income-tax Act, 1961?
Section 232 consolidates the conditions earlier found in Sections 115VT (reserve), 115VU (training) and 115VV (charter-in limit) of the Income-tax Act, 1961, with largely the same 20%, 8-year and 49% thresholds.
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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