Section 115VV: Limit for Charter-In of Tonnage

What is Section 115VV?

Section 115VV of Chapter XII-G of the Income-tax Act, 1961 regulates the charter-in proportion of qualifying ships operated by a company that has opted for the tonnage tax scheme. The rule is concerned with net tonnage, not the number of vessels, freight revenue, vessel value or gross registered tonnage.

Chartered-in ship: In general, a vessel operated under a charter arrangement rather than owned by the company. For this particular section, the statutory Explanation excludes a ship chartered in on bareboat charter-cum-demise terms from the expression "chartered in". The classification of each arrangement should be supported by its contract and applicable shipping records.

Qualifying ship: A ship meeting the requirements of the tonnage tax provisions, particularly section 115VD. Only qualifying ships are relevant to the computation under section 115VV.

Section 115VV explained, subsection by subsection

115VV(1): Maximum charter-in share of 49%

For every company opting for the tonnage tax scheme, not more than 49% of the net tonnage of qualifying ships operated during any previous year may be chartered in. This is a ceiling, not a minimum ownership percentage calculated by counting ships.

115VV(2): Annual average net tonnage

The charter-in proportion is determined using the average of net tonnage during the relevant previous year. Changes to the fleet during the year therefore matter; a snapshot on 31 March is not necessarily representative.

115VV(3): Prescribed method

The average net tonnage must be computed in the manner prescribed in consultation with the Director-General of Shipping. The detailed computation and supporting records should be checked against the applicable Income-tax Rules and relevant official guidance rather than assuming that a simple year-end ratio is sufficient.

115VV(4): Breach in one previous year

Where the charter-in net tonnage exceeds 49% in a previous year, the company's total income for that previous year is computed as though the tonnage tax option did not have effect for that year. This is an annual tax consequence even if the breach does not recur.

115VV(5): Breach in two consecutive previous years

If the limit is exceeded in two consecutive previous years, the option for the tonnage tax scheme ceases to have effect from the beginning of the previous year following the second consecutive year of excess. This is in addition to the year-specific consequence under subsection (4).

Explanation: Bareboat charter-cum-demise

A ship chartered in on bareboat charter-cum-demise terms is excluded from the term "chartered in" for this section. The exclusion does not itself establish that every such vessel qualifies under the tonnage tax scheme; other eligibility requirements continue to apply.

How the 49% charter-in limit works

The following simplified figures illustrate the percentage test. The statutory average must still be determined using the prescribed method.

Formula: Charter-in percentage = (average net tonnage of counted chartered-in qualifying ships / average net tonnage of all qualifying ships operated) × 100.

If the counted chartered-in tonnage instead averages 52,000 NT out of 100,000 NT, the ratio is 52%, exceeding the statutory ceiling. For an actual assessment, vessel entry and exit dates and the prescribed averaging methodology must be applied.

Consequences of non-compliance

Other provisions may also affect eligibility, approval, continuation and future re-entry into the scheme. In particular, read this section alongside section 115VS (restriction on opting again in specified cases) and section 115VQ (period and cessation of option). The interaction depends on the facts and the applicable law.

Practical compliance checklist

• Maintain a current list of qualifying ships with their certified net tonnage and operating dates.
• Identify owned, time-chartered, voyage-chartered and bareboat charter-cum-demise vessels separately.
• Verify whether each vessel is a qualifying ship under the applicable law.
• Compute the prescribed annual average rather than relying only on closing fleet figures.
• Monitor the charter-in percentage during the year to avoid inadvertently crossing 49%.
• Retain charter agreements, tonnage certificates, fleet schedules and computation working papers.
• Review prior-year breaches because two consecutive breaches can terminate the option prospectively.

Frequently asked questions

Is the 49% limit based on the number of ships?

No. Section 115VV refers to the net tonnage of qualifying ships, computed on an annual average basis.

What happens if the limit is breached only once?

Under subsection (4), total income for that previous year is computed as if the tonnage tax option were not effective for that year. The additional cessation rule in subsection (5) requires excess in two consecutive previous years.

Are bareboat charter-cum-demise ships counted as chartered-in?

No. The Explanation specifically excludes such ships from the expression "chartered in" for section 115VV. Other qualification rules remain relevant.

Does the 49% test apply to all ships in the fleet?

The statutory test concerns qualifying ships operated by the company. Vessel qualification and the prescribed averaging method must be checked first.

Official legislation and guidance

Consult the Income Tax Department for the Income-tax Act, 1961, relevant Income-tax Rules, notifications and updates; India Code for central legislation; and the Directorate General of Shipping for shipping-related rules and records. These official resources should be consulted to verify amendments and the prescribed averaging procedure.

Applicability note: The Income-tax Act, 2025 took effect from 1 April 2026. Section 115VV is the provision under the 1961 Act, relevant to periods and proceedings governed by that Act. For tax years governed by the 2025 Act, check the corresponding provisions, commencement and savings rules before applying historical section numbering.