Section 115VK: Depreciation of Tonnage Tax Assets
Section 115VK of the Income-tax Act, 1961 explains how the written down value of ships is divided between qualifying tonnage tax assets and other assets, and how depreciation is dealt with when their business use changes. For the tax year beginning 1 April 2026, the corresponding provisions appear in Section 229 of the Income-tax Act, 2025.
Purpose and important definitions
The tonnage tax scheme determines the taxable income of eligible shipping operations under special rules rather than by simply deducting ordinary business expenses from actual shipping receipts. Depreciation rules nevertheless matter for maintaining tax asset blocks, determining the consequences of a change in use, and calculating certain other tax outcomes.
- Qualifying assets: Ships qualifying for treatment under the tonnage tax provisions, grouped in a separate block for the statutory computation.
- Other assets: Non-qualifying ships in the original block, separately identified for the allocation.
- Written down value (WDV): The tax value of an asset block after the adjustments required by the applicable income-tax law.
- Book written down value: The written down value appearing in the company's books of account. This is used to determine the proportion in which the existing tax block is divided.
- First previous year / first tax year: The first year for which the company's tonnage tax scheme applies under the respective statute.
Section 115VK of the Income-tax Act, 1961: Explanation
Subsection (1): Depreciation in the first year
For the purpose referred to in Section 115VL(iv), depreciation for the first previous year of the tonnage tax scheme is computed using the written down value of qualifying ships determined under Section 115VK(2). This establishes the opening tax value of the qualifying block.
Subsection (2): Splitting the existing ships block
The tax WDV of the existing ships block on the first day of the first previous year is apportioned between qualifying and non-qualifying ships according to their respective aggregate book WDVs. The distinction between book WDV and tax WDV is essential: book values determine the allocation ratio, while the amount divided is the tax WDV of the original block.
Subsection (3): Separate qualifying block
The qualifying assets identified under subsection (2) form a separate block of assets for purposes of the tonnage tax chapter.
Subsection (4): Book-value calculation and revaluation
The book WDV of each qualifying ship and each other ship is taken from the books at the end of the immediately preceding previous year. Their values are aggregated and compared to determine the allocation ratio. A revaluation after the date on which the Finance (No. 2) Act, 2004 received Presidential assent is disregarded for this calculation, as required by the statutory proviso.
Subsection (5): Qualifying asset changes to another business
If an asset in the qualifying block starts being used outside the tonnage tax business, an appropriate portion of the qualifying block's tax WDV is transferred to the other-assets block. The amount is calculated in proportion to the book WDV of the asset changing use relative to the aggregate book WDV of all assets in the qualifying block.
Subsection (6): Other asset changes to tonnage tax use
The reverse adjustment applies when an asset in the other-assets block begins to be used in the tonnage tax business. A proportionate tax WDV is deducted from the other-assets block and added to the qualifying block.
Subsection (7): Depreciation where use changes during the year
For an asset covered by subsection (5) or (6), depreciation for the year is allocated by the number of days for which it was used in the tonnage tax business and in the other business, for the purpose specified in Section 115VL(iv).
Explanation 1: Depreciation on the two blocks is allowed as though their apportioned opening WDVs had been brought forward from the preceding previous year. Explanation 2: Book WDV means the value appearing in the books of account.
Section 229 of the Income-tax Act, 2025
Section 229, titled Depreciation and gains relating to tonnage tax assets, reorganises the corresponding rules for the new tax regime. It expressly refers to ships or inland vessels, as applicable, and also contains provisions concerning gains on the transfer of qualifying tonnage tax assets.
| Provision | What it provides |
|---|---|
| Section 229(1) | First-tax-year depreciation is based on the qualifying-asset WDV determined under subsection (2), with reference to Section 230(1)(d). |
| Section 229(2)-(3) | Division of the existing block between qualifying and other assets, with a separate qualifying block. |
| Section 229(4) | Proportionate transfers between blocks when the business use of an asset changes. |
| Section 229(5) | Allocation of depreciation by the number of days of each use during the tax year. |
| Section 229(6)-(7) | Continuity of the allocated WDV and definition of book WDV. |
| Section 229(8)-(10) | Capital gains rules for transfer of qualifying-block assets and the meaning of qualifying-block WDV. |
Statutory opening-block formulas
Section 229(2) states the allocation algebraically:
Qualifying block WDV (D) = A × B / (B + C)
Other-assets block WDV (E) = A × C / (B + C)
Here, A is the opening tax WDV of the existing ships or inland-vessels block, B is the aggregate book WDV of qualifying assets, and C is the aggregate book WDV of other assets, measured as specified in Section 229(2). The calculation assumes that the denominator is positive; exceptional factual cases require reference to the statute and applicable guidance.
Movement between blocks
Under Section 229(4)(a), the amount shifted out of the qualifying block is the opening WDV of that block multiplied by the changing asset's share of aggregate qualifying-asset book WDV. Under Section 229(4)(b), the equivalent proportion of the other-assets block is shifted into the qualifying block when an asset begins to be used for tonnage tax business. These are reallocations of tax block values, not fresh purchases or automatic additional deductions.
Gains on transfer of qualifying assets
Section 229(8)-(10) also addresses gains from the transfer of a capital asset in the qualifying block. It refers to Sections 67 and 74 and computation under Sections 67 to 81 of the 2025 Act, including a special reference to the WDV of the qualifying block. These provisions should be examined separately whenever a qualifying ship or other relevant asset is sold or transferred.
Example: Dividing a ships block
Assume a company enters the tonnage tax scheme with an existing ships block having tax WDV of Rs. 12 crore. The aggregate book WDV of qualifying ships is Rs. 9 crore, while the book WDV of other ships is Rs. 3 crore.
| Item | Amount / calculation |
|---|---|
| Existing tax WDV | Rs. 12 crore |
| Qualifying ships: book WDV | Rs. 9 crore |
| Other ships: book WDV | Rs. 3 crore |
| Qualifying block tax WDV | 12 × 9 / 12 = Rs. 9 crore |
| Other-assets block tax WDV | 12 × 3 / 12 = Rs. 3 crore |
The illustration shows only the opening-block split. Actual depreciation and subsequent adjustments depend on the applicable statutory provisions, asset use, dates and supporting records.
Recordkeeping and practical compliance
- Maintain a ship-wise or vessel-wise register showing qualifying status and changes in use.
- Preserve book WDV and tax WDV schedules for the opening year of the scheme.
- Document the basis for classifying assets as qualifying or non-qualifying.
- Record the effective dates when assets move between tonnage tax and other businesses.
- Reconcile depreciation and asset-block movements with tax computations and financial statements.
- Review capital-gains implications separately on a transfer of qualifying assets.
Frequently asked questions
Is depreciation separately deducted from tonnage income?
Tonnage income is calculated under the special scheme rather than through the ordinary profit-and-loss method. Section 115VK and Section 229 establish asset-block and depreciation treatment for specified statutory purposes; they should not be read as allowing an additional deduction from deemed tonnage income.
Does the tax WDV equal the book WDV?
Not necessarily. The book WDV determines the proportional split of the existing tax WDV; the amounts can differ because tax depreciation and accounting depreciation may follow different rules.
What if a ship starts being used in another business?
The applicable provision requires a proportionate transfer of WDV between blocks. Depreciation for the relevant year may also require a time-based allocation.
Which provision applies after 1 April 2026?
Section 229 of the Income-tax Act, 2025 is the corresponding current provision for tax years governed by that Act. Earlier periods must be considered under the 1961 Act and relevant transitional rules.
Official legislation and further reading
- Income-tax Act, 2025 - official Income Tax Department PDF (Section 229)
- Income-tax Act, 1961 as amended by Finance Act, 2025 - official PDF (Section 115VK)
- Section 115VJ - Treatment of common costs
- Section 115VL - Exclusion of deduction and set-off
This article provides general legal information. Application depends on the relevant tax year, statutory amendments and the company's facts. Last reviewed: 27 October 2026.