Income Tax Law / Tonnage Tax Scheme

Section 115VE of the Income-tax Act - Computation under the Tonnage Tax Scheme

Section 115VE explains how a tonnage tax company computes income from operating qualifying ships, why shipping operations must be treated as a separate business, and when the ordinary business-income provisions apply.

Legislative update: Section 115VE of the Income-tax Act, 1961 corresponds to Section 226(2) to (6) of the Income-tax Act, 2025, applicable under the new Act from 1 April 2026. The historical provision remains relevant to periods governed by the 1961 Act.

What is the tonnage tax scheme?

The tonnage tax scheme is a special method of determining taxable income from qualifying shipping operations. Instead of measuring the covered business solely by its accounting profits, the scheme uses statutory tonnage-income rules. The company must meet the applicable qualifying conditions and validly exercise its option.

Section 115VE explained subsection by subsection

Subsection (1): Mandatory computation for a tonnage tax company

A tonnage tax company engaged in operating qualifying ships computes profits from that business under the tonnage tax scheme. Once validly within the scheme, it cannot choose ordinary profit computation for the same covered shipping income at will.

Subsection (2): Shipping operations constitute a separate business

The business producing relevant shipping income under Section 115V-I(1) is treated as the tonnage tax business, distinct from the company's other activities. The separate-business principle prevents unrelated income from being automatically absorbed into tonnage income.

Subsection (3): Separate computation of profits

The company must compute the profits of the tonnage tax business separately from profits and gains of any other business. Appropriate records and allocations are important where expenses or resources are shared.

Subsection (4): A valid option is required

The scheme applies only where an option has been made in accordance with Section 115VP of the 1961 Act. Under the 2025 Act, the corresponding option provision is Section 231, as cross-referenced by Section 226(5). The option is not automatic merely because a company operates a qualifying ship.

Subsection (5): Ordinary taxation if not covered or not opted in

Where the company is outside the tonnage tax scheme, or has not exercised the required option, its shipping-business profits are computed under the other applicable provisions of the Income-tax Act.

Tonnage tax business and other business income

Item	Tax treatment
Eligible shipping operations under a valid tonnage tax option	Computed under the special tonnage tax provisions
Other activities of the same company	Computed separately under the applicable provisions
Shipping operations without a valid tonnage tax option	Computed under the ordinary applicable income-tax provisions

Section 115V: Definitions used in the shipping-company chapter, including terms relevant to tonnage tax.
Section 115VA: Permits eligible shipping income to be computed under the special chapter.
Sections 115VB to 115VD: Address operation of ships, qualifying companies and qualifying ships.
Section 115VF: Treats tonnage income computed under Section 115VG as profits chargeable under the business-income head, subject to the chapter.
Section 115VG: Provides the statutory method for calculating tonnage income.
Section 115V-I: Identifies relevant shipping income.
Section 115VP: Governs the method and time for exercising the option.

Illustrative example

Suppose a shipping company operates qualifying vessels and also runs a separate logistics consultancy. If it has validly opted into tonnage tax, income from eligible vessel operations is determined under the tonnage rules, while consultancy profits remain separately computed. The company must still apply the statutory rules governing relevant shipping income and shared costs. This example illustrates classification, not a tax-rate calculation.

Position under the Income-tax Act, 2025

Section 226(2) requires a tonnage tax company to compute qualifying shipping profits under the scheme. Section 226(3) treats the tonnage tax business as separate; subsection (4) requires separate computation; subsection (5) refers to the option under Section 231; and subsection (6) directs ordinary computation where the scheme does not apply or the option has not been made. Section 226(7) addresses tonnage income and refers to Section 227 for its computation.

Frequently asked questions

Is the tonnage tax scheme automatic for every shipping company?

No. The company must meet the relevant statutory requirements and make the prescribed option.

Can non-shipping business profits be included in tonnage income?

Not merely because the same company earns them. The tonnage tax business is separately identified and computed under the statutory rules.

What happens when no tonnage tax option is exercised?

Profits from shipping operations are computed under the otherwise applicable provisions of the Income-tax Act.

Official legal sources

Editorial update: 27 October 2026. This article provides general statutory information. For a particular tax year, verify the applicable law, rules, notifications and eligibility conditions.