Income tax law / Shipping taxation

Section 115VZ of the Income-tax Act, 1961: Demerger and Continuity of Tonnage Tax

Section 115VZ addresses what happens to an existing tonnage tax option when a shipping business is transferred from a demerged company to a resulting company under a scheme of demerger. It permits the scheme to apply to the resulting company for the remaining option period, subject to qualifying-company status and the other conditions of the tonnage tax chapter.

Reviewed: 27 October 2026 | Provision of the Income-tax Act, 1961; check applicable tax-year law

1. What Section 115VZ provides

Section 115VZ states that where, under a scheme of demerger, the demerged company transfers its business to the resulting company before the expiry of the option for the tonnage tax scheme, the scheme shall, as far as may be, apply to the resulting company for the unexpired period, if the resulting company is a qualifying company. This is expressly subject to the other provisions of Chapter XII-G.

The provision is a continuity rule, not an unconditional fresh grant of tonnage tax treatment. The resulting company must satisfy the relevant statutory requirements.

2. Important legal definitions

Demerger and resulting company

For the purposes of the 1961 Act, the definition of demerger is found in Section 2(19AA), subject to its detailed conditions. The resulting company is defined in Section 2(41A). A corporate restructuring described commercially as a demerger should not automatically be assumed to satisfy these statutory definitions.

Qualifying company

Section 115VC sets out the conditions for a qualifying company under the tonnage tax regime, including requirements relating to its status, management, ships and shipping activity. Eligibility must be reviewed for the resulting company after the transfer.

Tonnage tax option

Section 115VP concerns the exercise and approval of the option to be taxed under the tonnage tax scheme. Section 115VZ addresses the continuation of the existing option's remaining term after a qualifying demerger; it does not itself state that a new full option period starts.

3. Conditions for continuity after demerger

Core requirements under Section 115VZ
RequirementPractical significance
Scheme of demergerThe transfer must occur pursuant to a scheme of demerger, assessed against applicable legal definitions.
Business transfer before expiryThe relevant business must pass to the resulting company before the existing tonnage tax option expires.
Resulting company qualifiesThe resulting company must meet the statutory qualifying-company requirements.
Only unexpired period continuesContinuity is limited to the balance of the existing option period.
Other Chapter XII-G provisions applyRelevant accounting, shipping, reserve and other conditions continue to matter.

Where the resulting company does not qualify, Section 115VZ does not confer automatic entitlement to the tonnage tax scheme. The general income-tax consequences must then be evaluated under the law applicable to the relevant period.

4. Example: transfer during an existing option period

Assume Shipping Company A has a valid tonnage tax option with three years remaining. It transfers its shipping undertaking to Company B under a legally effective scheme of demerger. If Company B is a qualifying company and satisfies the other applicable conditions, Section 115VZ contemplates continuation of the scheme for those remaining three years, rather than an automatic fresh option term.

This illustration explains the statutory principle only. The effective date, statutory definition of demerger, eligibility, tax year and regulatory approvals must be verified in an actual transaction.

5. Practical compliance considerations

  • Review the demerger scheme, approval order and effective date against applicable company and tax law.
  • Verify the original tonnage tax approval and the exact unexpired option period.
  • Document how the transferred undertaking and qualifying ships pass to the resulting company.
  • Confirm that the resulting company satisfies Section 115VC and other applicable tonnage tax conditions.
  • Maintain appropriate books and audit records; see Section 115VW.
  • Review ship tonnage certification and other shipping records under Section 115VX.
  • Check whether tax filings, notifications or approvals are required under the legislation applicable to the relevant tax year.

Demerger versus amalgamation

Section 115VY deals with amalgamation, whereas Section 115VZ deals with demerger. The rules are distinct and should not be used interchangeably.

6. Income-tax Act, 2025 and the relevant tax year

The Income-tax Act, 2025 came into effect from 1 April 2026, subject to its commencement and transition provisions. Section 115VZ is a provision of the Income-tax Act, 1961. For earlier assessment periods and pending matters governed by the 1961 Act, its terms and applicable amendments remain important. For tax years governed by the 2025 Act, consult the corresponding current provisions and savings or transitional rules rather than assuming the old section number continues unchanged.

Corporate restructurings may also involve the Companies Act, 2013, shipping regulation and other tax provisions; Section 115VZ does not replace those requirements.

7. Frequently asked questions

Does demerger automatically renew the tonnage tax option?

No. Section 115VZ refers to the unexpired period of the existing option, subject to statutory conditions.

Can any resulting company claim tonnage tax after a demerger?

No. The resulting company must be a qualifying company and comply with the other relevant provisions.

What if the option has already expired before the transfer?

Section 115VZ specifically concerns a transfer before expiry. A separate analysis of the applicable eligibility and option provisions is necessary.

Is Section 115VZ the same as the amalgamation rule?

No. Amalgamation is addressed separately under Section 115VY.

8. Official legislation and guidance

This article is general legal information. For a specific demerger, verify the text and amendments applicable to the transaction date and relevant tax year.