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What is royalty?

A royalty is a legally bound payment given to a person or company for letting others use their assets, like copyrighted works, franchises, or natural resources. Think of musicians getting paid when their songs are played on the radio, in movies, at concerts, in bars and restaurants, or on streaming services. Royalties are generally meant to reward the owners of these assets when they permit someone else to use them, and this helps generate income for them.

Royalty Explained

Royalty payments often represent a portion of the total or net earnings gained from using assets. However, these payments can be individually negotiated, taking into account the preferences of both parties involved in the deal.

For instance, an inventor or original owner might opt to sell their creation to a third party in exchange for royalties based on the future revenues generated by that product. For example, computer manufacturers pay Microsoft Corporation royalties for the privilege of using its Windows operating system on their computers.

Royalties can come in different forms, such as those related to nonrenewable resources, patents, trademarks, franchises, copyrighted materials, book publishing, music, and art. Renowned fashion designers can even charge royalties to other companies for utilizing their brand names and designs.

Third parties compensate authors, musicians, and production experts for the usage of their copyrighted work. Television satellite providers make royalty payments to broadcast the most-watched channels nationally. In the realm of oil and gas, companies grant royalties to landowners for permission to extract natural resources from their properties.

It's important for royalty agreements to be mutually advantageous for both the licensor (the recipient of royalties) and the licensee (the payer of royalties). For the licensor, such an agreement can provide access to a new market, while for the licensee, it may grant access to products that would otherwise be unavailable