Section 115VB: Operating Ships and the Tonnage Tax Scheme
Section 115VB of the Income-tax Act, 1961 explains when a company is regarded as operating a ship for the tonnage tax regime. The corresponding current rule is contained in Section 226(1) of the Income-tax Act, 2025, which expressly covers ships and inland vessels.
Meaning of operating a ship under Section 115VB
For purposes of Chapter XII-G of the Income-tax Act, 1961, a company is treated as operating a ship if it operates a ship that it owns or charters. The definition also covers arrangements under which the company charters only part of a ship, including a slot charter, space charter or joint charter.
With effect from 1 April 2026, the statutory wording was extended to include an inland vessel, as applicable. The updated framework is now reflected in Section 226(1) of the Income-tax Act, 2025.
Charter arrangements explained
| Arrangement | General meaning and treatment |
|---|---|
| Owned ship | A company operates a vessel owned by it; ownership alone does not establish all the conditions for tonnage tax eligibility. |
| Chartered-in ship | A company operates a vessel chartered from another party; the operating arrangement can fall within the definition. |
| Slot or space charter | A company contracts for specified cargo capacity or space rather than an entire vessel; these arrangements are expressly contemplated. |
| Joint charter | Companies share chartered vessel capacity or an operating arrangement; the statutory definition expressly includes joint charters. |
| Bareboat charter-out exceeding three years | A company that charters out its vessel on bareboat or bareboat charter-cum-demise terms for more than three years is not regarded as its operator for this purpose. |
Bareboat charter exclusion: the three-year rule
The proviso to Section 115VB excludes a company from being regarded as the operator of a ship it has chartered out under bareboat charter or bareboat charter-cum-demise terms for a period exceeding three years. Section 226(1)(b) of the 2025 Act carries this exclusion forward for ships and inland vessels.
A bareboat charter generally involves delivery of the vessel without crew or operating services, with operational responsibilities allocated under the contract. A bareboat charter-cum-demise arrangement also contemplates transfer of ownership on the agreed terms. The contract and actual operational facts should be examined, rather than relying on its label alone.
Operating a ship does not automatically confer tonnage tax eligibility
Meeting the operating-ship definition is only one step. The company must also satisfy the relevant requirements concerning qualifying companies, qualifying ships, the scope of shipping income and a valid election into the tonnage tax scheme.
Under Section 226 of the 2025 Act, qualifying shipping profits are computed separately under the tonnage tax scheme when the required option is made in accordance with Section 231. Section 227 addresses computation of tonnage income and Section 228 addresses relevant shipping income.
Practical examples
- Example 1: A shipping company operates a vessel it owns. It can satisfy the operating-ship test, subject to the other requirements of the scheme.
- Example 2: A company charters cargo slots on a vessel operated in a shipping service. The arrangement may fall within the express slot-charter inclusion, subject to the actual facts.
- Example 3: A company charters its vessel out on bareboat terms for four years. It is excluded from being treated as the operator of that vessel under the stated proviso.
Relevant legal provisions and official sources
- Section 226, Income-tax Act, 2025 - Tonnage tax scheme (Income Tax Department).
- Income-tax Act, 2025, as amended by Finance Act, 2026 (official consolidated text).
- Income-tax Act, 1961 - Section 115VB and Chapter XII-G (official text).
- Finance Bill, 2025 - Notes on clauses (inland vessel amendment).
Frequently asked questions
Does a shipping company need to own a ship to operate it?
No. The statutory operating-ship definition covers owned ships and chartered-in arrangements, including specified part-vessel charters. Separate qualifying-company conditions may nevertheless require ownership of at least one qualifying ship.
Are inland vessels included?
Yes. The legislation extended the relevant provisions to inland vessels from 1 April 2026, and Section 226 of the 2025 Act expressly refers to them.
Is a four-year bareboat charter-out covered?
No. A vessel chartered out on bareboat or bareboat charter-cum-demise terms for more than three years falls within the statutory exclusion for the chartering-out company.
Updated: 27 October 2026. This article provides general legal information. Applicability depends on the relevant tax year, charter documents and statutory eligibility conditions.