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Section 80RRB: Deductions on Income from Patent Royalty
What is royalty, amount of deduction, eligibility, etc. for FY 2022-23 (AY 2023-24) & 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.
Meaning of Patent
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);
What is Royalty income on a patent?
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.
Concept of Section 80 RRB
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.
Amount of Deduction under Section 80RRB
The amount of deduction under section 80RRB is
- Rs. 3 Lakh or
- Income earned from "royalty of patent,"
- whichever is less.
Who is eligible for claiming a deduction under section 80RRB?
Numerous criteria must be satisfied to claim deduction under section 80RRB. They are:
- The individual who wants to claim the deduction should be a resident of India (HUF or Non-residents are not allowed to claim this deduction) . Only resident individuals in India are eligible for the deduction.
- The taxpayer must be an owner or co-owner of the patent and hold an original patent to apply for the deduction. With an original patent, one can apply for this deduction.
- The original patent that the taxpayer has must be registered with the Patent Act of 1970.
- The documents that are the evidence of royalty payments are to be produced to claim the deduction.
- The taxpayer must receive a royalty for a patent registered under the Patent Act after 31st march 2003. This also includes advance royalty, which is not returnable. Anything that is chargeable in capital gains is not considered a royalty.
- The assessee must file the return of income to claim the deduction.
- The taxpayer must furnish an online certificate in FORM No. 10CCE, signed by the relevant authority with the return of income.
- No Double deduction: Where a deduction for any previous year has been claimed and allowed in respect of any income referred to in this section 80RRB, no deduction in respect of such income shall be allowed under any other provision of the Act in any assessment year.
Treatment of Royalty from foreign sources
When the income from royalty is earned from some foreign sources, the deduction can be claimed but with few more conditions. They are:
- The income earned should be brought to India by the assessee in convertible foreign exchange.
- The income earned should be brought into India within a period of six months from the end of the previous year in which such income is earned or within the period specified by the Reserve Bank of India (RBI) or such other authority as is authorized.
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.
Frequently Asked Questions
Q- What is the benefit of Section 80RRB?
The innovators can claim a deduction on the royalty income for the innovations with patented rights.
Q- Who is eligible to avail of deduction under Section 80RRB?
The patent holders who are residents Individuals of India are eligible to claim a deduction on their royalty income from patents.
Q- What amount can be deducted under section 80RRB from income?
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.
Q- How are royalties paid?
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.
Q- How long do royalties last?
The tenure of royalties depends on the terms of tenure given in the royalty clause in a lease agreement.
Q- What is patent royalty income?
Patent royalty is the income received from a third party by an inventor to use an idea or product conceptualized by the inventor.