Section 80RRB: Deductions on Income from Patent Royalty

Meaning of Patent

Innovations are a regular activity in our country. Every new innovation is a boon to society and good for the country. For every new invention, innovators get an exclusive right for the same from the 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 rights of the innovator. Through this, the innovator can generate regular income by giving others the 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);

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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.

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What is Section 80RRB?

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.

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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.

Example for Calculation of Deduction under Section 80RRB

Let’s understand the calculation of the deduction under section 80RRB using this example -

Mr.A received a royalty of Rs. 4 lakhs from a patent that was developed by him. His expenses related to the patent are Rs. 50,000.

• Mr.A’s net royalty income is Rs. 3.5 lakhs (Rs. 4 lakhs - Rs. 50,000).
• He is eligible for a deduction of Rs. 3 lakhs under Section 80RRB.
• Therefore, his taxable income will be Rs. 50,000 (Rs. 3.5 lakhs - Rs. 3 lakhs).
• His tax liability is calculated on Rs. 50,000 at the applicable slab rates.

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Who is Eligible for Claiming a Deduction under Section 80RRB?

Numerous criteria must be satisfied to claim a 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 choose the old regime, as this deduction is only available under the old regime and not in the new regime.
• 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 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.

Note: This deduction is allowed only if the assessee opts for the old tax regime.

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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 abroad should be brought to India by the taxpayer 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.

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How to Avail of Deductions Under Section 80RRB?

There are various steps you need to follow to ensure compliance and maximize the tax benefits. Here are the steps -

• Verify the Eligibility: Check if you are eligible for the deductions available under section 80RRB.
• Determine the Deduction: Determine the amount of deduction that you are eligible for as per the limits prescribed under section 80RRB.
• Keep the documents handy: Maintain proper documentation of the royalty received and the deductions claimed under section 80RRB.
• File ITR: File your ITR and accurately report the deduction claimed under section 80RRB, and income from royalty received.
• Provide Necessary Information: Provide the details of the deduction claimed and the royalty income received in the relevant section of the ITR form. Double-check the information to ensure there are no errors or discrepancies.
• Submit Supporting Documents: Submit the supporting documents as evidence to substantiate the deduction claimed and the income received.
• Review and verify: Review your ITR before submitting it and verify all the details to avoid any possible errors.
• Submit the ITR: When you have completed the form, verified the entire return, and provided the necessary information and evidence, you can submit the ITR form.

Want to claim the deduction under section 80RRB? If yes, you must file your ITR accurately and on time. However, we understand that taxes can be complex. If you are also among those who find taxes complicated, you can get in touch with our tax experts, who can not only help you file your ITR but also maximize tax deductions and assist with notices. Book an eCA now!

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