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Meaning of Patent

New innovations are a regular activity in our country. Every new innovation is a boon to the society as well as good for the country. For every new invention, innovators get an exclusive right for the same from relevant authorities. This grant them authority to let others use their innovation for a limited time period. The right granted to the innovators is called patent. All the technicalities about the invention are disclosed in the patent application. Patents protect the intellectual property right of the innovator. Through this the innovator can generate regular incomes by giving others authority to use their patented project Tax Law defines the 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 sale of product manufactured with the use of patented process or of the patented article for commercial use) for—

  • (i) the transfer of all or any rights (including the granting of a licence) 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 patent?

When the innovator gives 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 patent. The innovator generally invents an idea. Other entities use the same idea for producing an effective product to use for commercial purposes. The selling of these products generates income for the business entity. For this the innovators are given consideration in the form of royalty income in return for their rights to use. The amount that innovators get is a fixed amount or a percentage of sales every year till the rights are being used.


Concept of Section 80 RRB

Royalty income for patent is the amount received by the innovator against the usage of their new patented innovation. This can include, books, inventions, music, art and so on. 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 deduction under section 80RRB?

There are numerous criteria that 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 for 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 deduction. Without original patent one can not apply for this deduction.
  • The original patent that taxpayer is having must be registered with the Patent Act, 1970.
  • The documents that are the evidence of royalty payments are to be produced to claim the deduction.
  • The taxpayer must receive royalty in respect of patent 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 as royalty.
  • The assessee must file return of income to claim the deduction.
  • The taxpayer must furnish an online certificate in FORM No. 10CCE, signed by relevant authority with the return of income.
  • If any deduction is already made for the claim of royalty income in previous years under section 80RRB, no deduction will be allowed in any other provision of the income tax act for the any assessment year. That means there will not be double deduction for 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 authorised.

Conclusions

This section saves tax liabilities for royalty income from patents. If you are an innovator and invent new things get it patented to avail deductions under Section 80RRB. Get the exclusive rights and receive royalty for your innovations. Against this income you can claim 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 deduction on the income from royalty for the innovations that have patented rights.


Q- Who are eligible to avail deduction under Section 80RRB?

The patent holders who are residents Individuals of India are eligible to claim deduction on their royalty income from patents.


Q- What is the amount that can be deducted under section 80RRB from income?

The deduction that can be claimed is maximum upto Rs 3 lakh or actual royalty payment received by the patent holder whichever is less.


Q- What is the average royalty paid for oil?

Royalty can be 1/8 of production or 12.8 percent of production. However, it can vary depending on the royalty clause in a lease. (This question can be removed as proper data couldn’t be found. Copy pasted content FYI only - ONGC makes payment of royalty at the rate of 20 percent of the oil price on the entire output from the field irrespective of its stake.)


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- Do DJS have to pay royalties?

Normally, DJs are not liable to pay royalties as event organisers to pay royalty to use copyrighted songs.(Little unsure of the answer)


Q- How long do royalties last?

The tenure of royalties depends on the terms of tenure given in royalty clause in a lease agreement.


Q- What is patent royalty income?

Patent royalty income is the income received from a third party by an inventor for the use of idea or product conceptualised by the inventor.


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CA Abhishek Soni

Abhishek Soni is a Chartered Accountant by profession & entrepreneur by passion. He is the co-founder & CEO of Tax2Win.in. Tax2win is amongst the top 25 emerging startups of Asia and authorized ERI by the Income Tax Department. In the past, he worked in EY and comes with wide industry experience from telecom, retail to manufacturing to entertainment where he has handled various national and international assignments.