Section 115VT of the Income-tax Act, 1961: Transfer of Profits to the Tonnage Tax Reserve Account

What is the Tonnage Tax Reserve Account?

Under Chapter XII-G of the Income-tax Act, 1961, a tonnage tax company generally pays income tax on qualifying shipping income computed under a statutory tonnage formula rather than its ordinary accounting profits. Section 115VT requires a portion of specified shipping book profit to be credited to a dedicated Tonnage Tax Reserve Account and applied for the permitted shipping purposes.

The reserve obligation is linked to activities described in clauses (i) and (ii) of Section 115VI(1) (often printed as section 115V-I): core and incidental activities forming relevant shipping income. For this section, book profit has the meaning in the Explanation to Section 115JB(2), to the extent attributable to those activities.

Applicable law: The 1961 Act provision is relevant to periods governed by that Act and transitional matters. The Income-tax Act, 2025 came into force on 1 April 2026; for tax years governed by the 2025 Act, consult its operative tonnage tax provisions and savings rules rather than applying Section 115VT mechanically. The original 1961 Act numbering is retained for this reference page.

Section 115VT explained subsection by subsection

Subsection (1): Minimum 20 percent transfer

A tonnage tax company must credit at least 20 percent of the book profit derived from the specified qualifying shipping activities for each previous year to the Tonnage Tax Reserve Account. The company may transfer more than 20 percent, but the excess is subject to the same utilisation requirements under subsection (3).

The relevant book profit is determined by reference to the statutory Section 115JB definition, confined to the specified shipping activities. It is not necessarily identical to statutory tonnage income or total company-wide profit.

Subsection (2): Shortfall where other activities cause book losses

Where the company has book profit from operating qualifying ships but book losses from other sources, so that it cannot create the full reserve, it must create as much as possible. The shortfall is added to the reserve required in the next previous year and treated as part of that next year's obligation.

The first proviso treats the initial year as compliant to the extent its shortfall is properly carried forward. The second proviso limits that relief if a shortfall in creating reserves continues for two consecutive previous years. A company should document the losses, its ability to transfer and the carried-forward amount.

Subsection (3): Permitted use and eight-year deadline

The reserve must be utilised before expiry of eight years following the previous year in which it was credited for acquiring a new ship for the company's business. Until the acquisition, the reserve may be used for operating qualifying ships, but not for dividends or profit distributions, remittance of profits outside India, or creation of an asset outside India.

Temporary deployment for permitted shipping operations should not be confused with permanent satisfaction of the ship-acquisition requirement: the eight-year deadline remains important.

Subsection (4): Tax consequences of improper use, non-use or early sale

A proportionate amount of the relevant shipping income becomes taxable under the ordinary provisions of the Act when reserve funds are (a) used for an unauthorised purpose, (b) not used to acquire a new ship within the required eight-year period, or (c) used to acquire a ship that is sold or transferred, other than in a qualifying demerger, before the end of three years from the end of the previous year of acquisition.

The amount is calculated by multiplying the total relevant shipping income for the year the reserve was created by the ratio of the offending reserve amount to the total reserve created that year. The proviso requires reduction for the proportionate tonnage income already charged to tax when the reserve was created.

Subsection (5): Insufficient reserve credit

Where the reserve credited is below the statutory minimum, the proportion of relevant shipping income corresponding to the reserve shortfall is excluded from tonnage tax treatment and taxed under the other provisions of the Act. The proportion is the shortfall divided by the minimum reserve requirement, applied to total relevant shipping income. Read this with subsection (2), which provides specific relief where qualifying shipping profits coexist with other book losses.

Subsection (6): Failure in two consecutive years

If the required reserve is not created in two consecutive previous years, the tonnage tax option ceases to have effect from the beginning of the previous year following the second consecutive failure. Loss of the option can also interact with the restrictions on future eligibility under Section 115VS.

Explanation: Meaning of a new ship

For Section 115VT, a new ship includes a qualifying ship previously used by another person, provided it had not at any time before the qualifying company's acquisition been owned by a person resident in India. Thus, the term is wider than a newly constructed vessel, but the prior ownership condition matters.

Illustrative reserve calculation

In the absence of applicable subsection (2) relief, subsection (5) can cause 20 percent of the relevant shipping income to be taxed under the ordinary provisions rather than under the tonnage tax scheme. The precise tax computation depends on the statutory facts and the income already charged.

Separate example of subsection (4): If Rs. 25 lakh of a Rs. 1 crore reserve is used for an impermissible purpose, the affected proportion is 25 percent. The ordinary-tax adjustment is calculated with reference to 25 percent of relevant shipping income in the reserve-creation year, reduced by the corresponding tonnage income already taxed, as the proviso directs.

Compliance checklist for shipping companies

• Calculate qualifying shipping book profit separately from other business activities.
• Transfer at least 20 percent to the designated reserve, subject to statutory shortfall rules.
• Maintain year-wise records of reserve creation, carried-forward shortfalls and utilisation.
• Track the eight-year deadline for acquisition of a new ship for each year's reserve.
• Do not apply reserve funds to prohibited dividends, overseas profit remittances or overseas asset creation.
• Monitor the three-year holding period after ship acquisition and the demerger exception.
• Review consecutive-year reserve failures and the effect on tonnage tax eligibility.

Related compliance provisions include Section 115VU (training), Section 115VV (charter-in limits) and Section 115VW (accounts and audit).

Frequently asked questions

Is the reserve calculated on tonnage income?

No. Section 115VT(1) bases the minimum 20 percent transfer on the specified shipping book profit, determined using the statutory definition, rather than on the tonnage tax income formula.

Can a company transfer more than 20 percent?

Yes. The proviso expressly allows an excess transfer, but the excess must also be used in accordance with subsection (3).

Can reserve funds be used for day-to-day shipping operations?

They may be used for the business of operating qualifying ships until a new ship is acquired, subject to the specific exclusions and ultimate acquisition requirement.

Does buying a second-hand ship satisfy the requirement?

It can, if the ship is qualifying and satisfies the Explanation's condition that it was never previously owned by an Indian resident.

What if the reserve is not created in two successive years?

Subsection (6) provides for cessation of the tonnage tax option from the beginning of the previous year following the second consecutive failure, subject to the precise statutory conditions.

Official legislation and updates

• Income Tax Department - Income-tax Act, 1961
• Income Tax Department - statutory updates and rules
• India Code - central legislation, including the Income-tax Act, 2025

This article explains the supplied Section 115VT text and its practical operation. Verify the law applicable to the relevant tax year, amendments and any transitional provisions before taking a tax position.