Tax regime on IP in India - Overview

What is Royalty income in India?

Royalty income in India is defined in the Explanation 2 of clause (vi) of subsection (1) of section 9 of the Income Tax Act, 1961.

Royalty income is the income of the recipient for -

  • the transfer of all or any rights (including the granting of a licence) in respect of a patent, invention, model, design, secret formula or process or trade mark or similar property;
  • the imparting of any information concerning the working of, or the use of, a patent, invention, model, design, secret formula or process or trade mark or similar property;
  • the use of any patent, invention, model, design, secret formula or process or trade mark or similar property;
  • the imparting of any information concerning technical, industrial, commercial or scientific knowledge, experience or skill;
  • the use or right to use, any industrial, commercial or scientific equipment but not including the amounts referred to in section 44BB;
  • the transfer of all or any rights (including the granting of a licence) in respect of any copyright, literary, artistic or scientific work including films or video tapes for use in connection with television or tapes for use in connection with radio broadcasting, but not including consideration for the sale, distribution or exhibition of cinematographic films; or
  • the rendering of any services in connection with the activities referred to above.

Therefore, any income arising from the above said means is royalty income.

Tax scenario

Following are the classification in which royalty income is taxed,

  • Royalty income for a resident or an Indian entity.
  • Royalty income for a non-resident or a foreign entity which does not have a place of business in India.
  • Royalty income for a non-resident or a foreign entity which is having a place of business in India.

Royalty income for a resident or an Indian entity

  • Royalty income for a natural person

    • Provision of Section 80RRB can be implemented on total income by means of royalty paid towards the Patent. No deduction of expenditure incurred is allowed. This provision provides deduction upto Rs 3 lakhs. Excess amount of Rs. 3 Lakhs is taxed at the rate of 10% as per the provision of section 115BBF.
    • Provision of Section 80QQB can be implemented on total income by means of royalty paid towards the copyright. No deduction of expenditure incurred is allowed. This provision provides deduction upto Rs 3 lakhs. Excess amount of Rs. 3 Lakhs is taxed at the rate of 10% as per the provision of section 115BBF.
  • Royalty income for an Indian entity

    • Provision of Clause (b) of Sub-Section (1) of Section 115A is that the tax payable on the income from royalty is of 10%. No deduction of expenditure incurred is allowed, in computing the royalty income
  • Royalty income for a non-resident or a foreign entity which does not have a place of business in India.

    • Provision of Clause (b) of Sub-Section (1) of Section 115A is that the tax payable on the income from royalty is 10%. No deduction of expenditure incurred is allowed, in computing the royalty income.
    • Provision of Section 44D may apply if the agreement between the foreign entity and the Indian entity is made before the 1st day of April, 1976. This provision provides deduction of up to 20% on royalty income, provided no deduction of expenditure incurred is allowed, in computing the royalty income.
    • Apart from the above, provisions of Section 90 may apply by the non-resident or the foreign entity for favourable taxation by means of Double Taxation Avoidance Agreement (DTAA) between India and the country of the said non-resident or the foreign entity.
  • Royalty income for a non-resident or a foreign entity which is having a place of business in India.

    • Under the provision of Section 44DA, if income arises by means of royalty for the non-resident or the foreign entity, such income is considered under the heads of profits, provided such entity is having place of business in India and the place of business in India has considerable effort in such income.
    • Otherwise, such income may be taxed as per provision of Clause (b) of Sub-Section (1) of Section 115A.
    • Apart from the above, provisions of Section 90 may be implied by the non-resident or the foreign entity for favourable taxation by means of Double Taxation Avoidance Agreement (DTAA) between India and the country of the said non-resident or the foreign entity.

Pradeep M
Patent Analyst
Surana & Surana International Attorneys