Section 232
Section 232: conditions for staying eligible under the tonnage tax scheme
Having opted into the tonnage tax scheme under Section 231, a company must keep meeting a set of ongoing conditions to remain eligible: creating a minimum reserve, using it only for buying new ships, meeting seafarer training requirements, staying under a chartered-in tonnage limit, and maintaining separate books - failure on any of these can end the option.
The Tonnage Tax Reserve Account
A tonnage tax company must credit to a "Tonnage Tax Reserve Account" an amount of 20% or more of the book profit derived from its core and incidental tonnage tax activities each tax year, for use as described below.
"Book profit" for this purpose has the meaning given in Section 206(1)(c), so far as it relates to income from those activities.
If the company has book profit from operating qualifying ships but a book loss from other sources and so cannot create the full reserve, it creates what it can that year, and the shortfall is carried forward and treated as part of the following year's reserve requirement - except this shortfall carry-forward does not apply a second time if the shortfall continues for two consecutive tax years.
How the reserve must be used
Amounts credited to the Tonnage Tax Reserve Account must be utilised within eight years, following the tax year of credit, for acquiring a new ship or new inland vessel for the company's business, and until such acquisition, may not be used for anything else - including distribution as dividends or profits, remittance outside India, or creating any asset outside India.
Consequences of misuse or non-utilisation
If reserve amounts are used for a purpose other than acquiring a new qualifying ship, are not utilised within the eight-year window, or are used to acquire a ship that is then sold or transferred (other than under a demerger) within three years of acquisition, a proportionate part of the year's relevant shipping income becomes taxable under the Act's other provisions - reduced by the proportionate tonnage income already taxed for the year the reserve was created.
Similarly, if the amount actually credited to the reserve falls short of the required 20% minimum, a proportionate part of relevant shipping income for that year is taxed outside the tonnage tax scheme.
If the required reserve is not created for any two consecutive tax years, the tonnage tax option ceases from the beginning of the tax year following the second consecutive year of failure.
Frequently asked questions
What percentage of book profit must go into the Tonnage Tax Reserve?
20% or more of the book profit derived from the company's core and incidental tonnage tax activities each tax year.
How long does the company have to use the reserve to buy a new ship?
Eight years from the end of the tax year in which the amount was credited to the Tonnage Tax Reserve Account.
Is there a limit on how much tonnage a tonnage tax company can charter in from others?
Yes - Section 232(15) caps chartered-in net tonnage (excluding bareboat charter-cum-demise arrangements) at not more than 49% of the net tonnage of qualifying ships the company operates during the tax year, calculated on an average basis; exceeding this for two consecutive years ends the option.
What other conditions apply to keep the option in force?
The company must maintain separate books of account for its ship-operating business, furnish an accountant's report before the specified date, comply with the minimum seafarer training requirement notified by the Central Government, and furnish a certificate of compliance from the Director-General of Shipping (or the relevant State authority for inland vessels) along with its return of income.
Related sections
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Talk to our tax team about tonnage tax scheme complianceLast updated 9 September 2026