Income tax law | Shipping companies | Updated October 2026

Section 115VN: Capital Gains on Transfer of Tonnage Tax Assets

Section 115VN of the Income-tax Act, 1961 deals with the tax treatment of gains arising when a shipping company transfers a capital asset belonging to its block of qualifying assets. Although eligible shipping operations are taxed under the tonnage tax scheme, the transfer of such capital assets remains subject to the capital gains provisions.

What does Section 115VN mean?

The provision ensures that profits or gains from transferring capital assets forming part of the qualifying-asset block are taxed under the capital gains rules rather than being treated as ordinary tonnage income. It expressly connects the tonnage tax scheme with section 45 (chargeability of capital gains), section 50 (special computation for depreciable assets) and sections 45 to 51 (capital gains framework) of the 1961 Act.

The term qualifying assets is linked to qualifying ships identified and segregated into a separate block under section 115VK. A ship being used in a tonnage tax business does not by itself mean every receipt from selling that ship is exempt or absorbed into tonnage income.

Section 115VN: Provision, proviso and explanation

1. Main provision: Gains remain chargeable to capital gains tax

Profits or gains arising from the transfer of a capital asset that forms part of the block of qualifying assets are chargeable under section 45 read with section 50. The amount is determined under the applicable provisions of sections 45 to 51. The calculation must take account of the depreciable block mechanism and any relevant adjustments.

2. Proviso: Use the qualifying-asset block WDV

When applying section 50 to these assets, the expression "written down value of the block of assets" is read as "written down value of the block of qualifying assets". This substitution is central: the qualifying shipping assets are not indiscriminately combined with the company's other depreciable assets.

3. Explanation: How the WDV is determined

For this purpose, the written down value (WDV) of the qualifying-asset block is the value computed under section 115VK(2). That provision prescribes how the existing ship-asset block is split between qualifying and non-qualifying ships when the company first enters the scheme.

How are capital gains on tonnage tax assets calculated?

Under the 1961 Act, section 50 ordinarily determines gains for depreciable assets on a block basis. Depending on whether the block continues and the applicable statutory conditions, the relevant comparison takes account of the qualifying block's opening WDV, eligible additions and consideration received on transfers. A positive difference can give rise to deemed short-term capital gains under section 50; the sale of a single ship does not necessarily produce an independently computed gain if other assets remain in that block.

Illustrative example: Sale of a qualifying ship

Assume a shipping company's qualifying-asset block has an opening tax WDV of Rs. 8 crore, with no qualifying additions during the year. It sells one ship for Rs. 10 crore, with no transfer expenses or other relevant adjustments. If the relevant section 50 conditions are satisfied, the illustrative excess of Rs. 2 crore may be treated as deemed short-term capital gains.

This is a simplified illustration, not a universal formula. Actual computation depends on the composition and existence of the block, transfer expenses, additions, other disposals and the law governing the relevant tax year.

Corresponding law from 1 April 2026: Section 229 of the Income-tax Act, 2025

The Income-tax Act, 2025 consolidates the rules for depreciation and gains relating to tonnage tax assets in section 229. The official section correspondence identifies the earlier section 115VN with section 229(8) to (10):

• Section 229(8): Gains from transfer of a capital asset forming part of the qualifying-asset block are chargeable under section 67 read with section 74, and computed under sections 67 to 81.
• Section 229(9): The section 74 reference to WDV of the block is applied as WDV of the block of qualifying assets.
• Section 229(10): Defines that WDV by reference to section 229(2).

The broader section 229 also addresses division of qualifying and other asset blocks, changes in asset use and related depreciation. The tax-year-specific legislation should be checked before calculating a disposal gain.

Practical compliance checklist

• Confirm that the company validly opted for the tonnage tax scheme and identify the applicable tax year.
• Verify whether the transferred asset belongs to the qualifying-asset block.
• Reconcile the opening WDV, book WDV allocation and subsequent changes under section 115VK or section 229.
• Maintain ship purchase and sale documents, transfer expenses, block schedules and depreciation records.
• Apply the correct capital gains provisions for the governing Act and report the transaction separately from tonnage income.
• Check related-party pricing and other applicable provisions where the transaction is not at arm's length.

Frequently asked questions

Is the profit on sale of a qualifying ship covered by tonnage tax?

No. Section 115VN specifically subjects gains on transfer of qualifying-block capital assets to the capital gains provisions; they are not automatically sheltered by the tonnage-income computation.

Which WDV is used for the capital gains calculation?

The WDV of the block of qualifying assets, determined under section 115VK(2) of the 1961 Act, subject to subsequent relevant adjustments. Under the 2025 Act, see section 229(2) and (10).

Does Section 115VN apply after 1 April 2026?

For tax years governed by the Income-tax Act, 2025, consult section 229(8) to (10). Section 115VN remains important for earlier periods governed by the 1961 Act and applicable transitional matters.

Does Section 50 always mean a gain arises when one ship is sold?

No. The computation operates through the relevant depreciable asset block. The result depends on the block's WDV, additions, disposals and whether the block continues to exist.

Official legislation and references

• Income Tax Department: Section 115VN, Income-tax Act, 1961
• Income Tax Department: Income-tax Act, 1961 (as amended by Finance Act, 2025)
• Income Tax Department: 1961-to-2025 section correspondence (navigator)
• Income Tax Department: Current legislation and notifications

Editorial note: This article explains the statutory framework for general information. Specific transactions require examination of the applicable tax year, block records, and any subsequent amendments or notifications.