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What is royalty, amount of deduction, eligibility, etc. for FY 2022-23 (AY 2023-24AY) & FY 2021-22 (AY 2022-23)
Royalty on the patent is like a reward for doing exceptional work. To encourage individuals income tax act - introduced Section 80RRB. Under this section, a deduction is given to taxpayers for income from royalty on a patent. The assessee is eligible to claim deductions under section 80RRB. The major aim is to encourage patenting and exceptional work by individuals in India.
Innovations are a regular activity in our country. Every new innovation is a boon to the society and good for the country. For every new invention, innovators get an exclusive right for the same from relevant authorities. This grants them the authority to let others use their innovation for a limited time period. The right granted to the innovators is called a patent. All the technicalities of the invention are disclosed in the patent application. Patents protect the intellectual property right of the innovator. Through this, the innovator can generate regular income by giving others authority to use their patented project. Tax Law defines Royalty as below:
"royalty," in respect of a patent, means consideration (including any lump sum consideration but excluding any consideration which would be the income of the recipient chargeable under the head "Capital gains" or consideration for the sale of product manufactured with the use of patented process or the patented article for commercial use) for—
(i) the transfer of all or any rights (including the granting of a license) in respect of a patent; or
(ii) the imparting of any information concerning the working of, or the use of, a patent; or
(iii) the use of any patent; or
(iv) the rendering of any services in connection with the activities referred to in sub-clauses (i) to (iii);
When the innovator gives the right to use his or her patented project to some other person or entity, they receive a payment. This is said to be royalty income on a patent. The innovator generally invents an idea. Other entities use the same idea to produce an effective product to use for commercial purposes. The selling of these products generates income for the business entity. For this, the innovators are considered in the form of royalty income in return for their rights to use. Innovators get a fixed amount or a percentage of sales every year until the rights are used.
Royalty income for patents is the amount received by the innovator against the usage of their new patented innovation. This can include books, inventions, music, art, etc. These payments are recurring in nature for a specified time period. Individuals who receive this kind of income against their innovations can claim deductions under section 80RRB of the Income Tax Act, 1961.
The amount of deduction under section 80RRB is
Numerous criteria must be satisfied to claim deduction under section 80RRB. They are:
When the income from royalty is earned from some foreign sources, the deduction can be claimed but with few more conditions. They are:
This section saves tax liabilities for royalty income from patents. If you are an innovator and invent new things, get it patented to get royalty and avail deductions under Section 80RRB. Get exclusive rights and receive a royalty for your innovations. Against this income, you can claim the deduction and decrease your burden of taxation. The deduction that can be claimed is royalty received or Rs. 3 lakh, whichever is lower.
The innovators can claim a deduction on the royalty income for the innovations with patented rights.
The patent holders who are residents Individuals of India are eligible to claim a deduction on their royalty income from patents.
The deduction that can be claimed is a maximum of up to Rs 3 lakh or actual royalty payment received by the patent holder, whichever is less.
Royalties are agreed upon as a percentage of gross or net revenues derived from the use of an asset or a fixed price per unit sold of an item.
It might be a fixed amount every year or a certain percentage of sales for a given period of time.
The tenure of royalties depends on the terms of tenure given in the royalty clause in a lease agreement.
Patent royalty is the income received from a third party by an inventor to use an idea or product conceptualized by the inventor.
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