Taxation On Income From Royalty Under Income Tax Act, 1961 (2022)

This article has been written by Avinash Kumar, a 3rd-year law student pursuing B.com LLB from School of law, UPES Dehradun. This article discusses the concept of taxation on income from royalty. In this article, I have described the meaning of royalty, deduction in respect of royalty income of author, deduction in respect of royalty on patents.

Table of Contents

Income Tax Act itself provides many ways to save the tax. Just you need to apply tax planning to save the tax. Income from royalty is one of the ways to save the tax. In India tax planning is legal. The income from royalty can be claimed as a deduction under the Income Tax Act, 1961. If an individual earns income by royalties then they can take advantage of tax deduction. If you have created music, invented new medicines, written a book then in those situations you can take the benefit of tax deduction under the Income Tax Act 1961. It doesn’t matter that from where are you getting the royalty, the government will treat those royalty as an income and expect you to report that income on your taxes.

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Section 9 of the Income Tax Act 1961 talks about income deemed to accrue or arise in India. When we use the originally created asset of an individual or proprietor then the amount paid to them for using their asset is termed as the royalty. It is a legally binding payment to an individual till the date the benefit of their assets is availed.

If anyone uses the copyright, trademark, patent, procedural knowledge of an individual then he is legally bound to pay the royalty. Basically, it is a contract between the proprietor and the individual who is doing the contract for the use of their intellectual property rights.

For example: when you use the patent of an individual then the amount you paid to the patentee for using their patent is considered as royalty. In the same way, if an author writes a book and gives its copyright to the publisher then the publisher is legally bound to pay the royalty according to the number of books sold. Sometimes, when the owner sells the product he is entitled to a one-time payment and not the royalty, in a consequence of which he loses the ownership over it. For example, A discovered new software and after that A sold his software to B. Then in this situation he will not get any royalty for his software. When he sells his software he gets a one-time payment instead of royalty after that, he will not have any right over the software.

To determine the exact nature of the payment made, the type of information passed on needs to be verified. If someone gives the payment for passing the information then, in that case, these payments will not come under the category of royalty income. In the case of CIT vs Heg India 130 Taxman 72, an Indian company wants to take some technical information from the US Company. In this regard, an Indian Company paid some amount of money to the US Company. In this case, the Madras High Court held that if anyone is paying the money for obtaining the information, data or a calculation sheet, such money will not be treated like royalty payment.

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Royalty Income Of Author

An author earns income by publishing their book. The publisher publishes the author’s book and the author gets the profit against the total number of books sold. The profit earned by the author will be a royalty income for the author. An author is someone who uses his skill, knowledge to write something. Nowadays the writer writes books, articles and publishes their write up on many platforms. An author creates a contract with the publisher for selling his books, whereas the writer creates a contract with the director for casting his story in the film. After that writer gets the money from the publisher will be royalty income for the author. Against such type of royalty income, the author can claim the deductions under Section 80QQB of Income Tax Act 1961.

Gross Total Income For The Author

For availing the benefit of tax deduction under Section 80QQB of Income Tax Act, Gross total income of an individual includes:

  1. If anauthor derived his income from his profession;
  2. If an author obtained an income from writing a book of his interest in respect of the copyright of his books being a work of literary, scientific or artistic;
  3. If an author receives an advance payment of royalty but royalty shouldn’t be non- refundable.

Royalty Deduction allowed Under Section 80QQB

  1. If an assessee wants to claim deductions under section 80QQB then he can get a deduction of up to 3,00,000.
  2. Or Gross total income earned by him.
  3. Or whichever is less.

Condition For Claiming Deduction Under Section 80QQB

Following conditions which are mentioned under the Income Tax Act, 1961 says that if an assessee wants to claim deductions under Section 80QQB they have to fulfill the following conditions:

  1. For claiming the tax benefit an assessee should be resident of India. Deduction under Section 80QQB is not available to the non-resident.
  2. For claiming the tax benefit under Section 80QQB of Income Tax Act 1961, an assessee should be an author. Here the author also includes the joint author which means that a joint author can also take a tax deduction under Section 80QQB.
  3. The content of the author’s book should be artistic, literary or scientific in nature.
  4. The topic of the author’s books shouldn’t include brochures, commentaries, diaries, journals, magazines, textbooks, pamphlets, or other publications of similar nature.
  5. An assessee can claim the tax deductions only at the time of filing income tax returns.
  6. The amount should be received in lump sum consideration. If the amount is not received in lump sum consideration, income as in excess of 15% of the value of books sold during the year should be ignored.

How to get Deduction under Section 80QQB?

  • If an individual is a resident of India and wants to take the deduction under Section 80QQB then he has to fill the certificate Form 10CCD
  • If an individual has earned the income from foreign, in that case, he can claim the tax deduction, if the amount brought to in India within the period of six months from the end of the previous year or the time period allotted by the competent authority. So in order to get the deduction a person has to fill out Form 10H.

Example Of Deduction Under Section 80QQB

Let’s understand deduction through an example of deduction under Section 80QQB. Suppose Ajit Bharti has written a book named “Gharwapsi”. He is a resident of India. In a financial year, he earns Rs. 2,00,000 as a royalty income from publishers. He also has a business from which he earns Rs. 4,00,000. Now if he wants to take the tax benefit under section 80QQB then he has to deduct the income of royalty from the gross total income. So Ajit Bharti will have to pay the tax on Rs. 4,00,000 because he can take the tax deduction on Rs. 2,00,000 under 80QQB of Income Tax Act, 1961.

Patent

The patent is a right granted to an inventor by the government that permits the inventor to exclude others from making, selling or using the invention for a period of time. A Patent is also termed as the intellectual property right that ensures the innovator that innovator invention is secured. If an individual gets the patent then it excludes others from making, selling, or using the invention for a particular period of time. By inventing something unique an innovator can earn a regular income. The payment which the innovator gets from inventing something will be termed as royalty income for the innovator. The examples of patentable items are like chemical formulas, computer software, and hardware, drugs, medical equipment, musical instruments, etc.

For example, let’s take an example, Rohan invented a medicine which cures the diseases of cancer and he applies for the patent and he gets the patent then he has a right over these medicines.

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Section 80 RRB of Income Tax Act, 1961

An individual whose source of income is in the form of royalty paid on the work which pertains to art, patents, inventions can claim the deductions under Section 80RRB of the Income Tax Act, 1961.

Taxation On Income From RoyaltyUnder Income Tax Act, 1961 (3)

Eligibility For Claiming deductions in respect of income from Patent

If an individual wants to claim a deduction under Section 80RRB of Income Tax Act 1961 then he will have to satisfy the following criteria:

  1. He must be a resident of India;
  2. An individual must be an owner of the patent for claiming the deduction under Section 80RRB of Income Tax Act 1961. If an individual doesn’t have an original patent he can’t claim tax benefit;
  3. An income earned by the royalties in respect of patents must be registered under the patent Act, 1970 on or after the 1st April 2003.

Up to what Extent Deduction on Patents can be claimed?

Income earned from Royalty is eligible for deduction under the Income Tax Act 1961. These are the following points that an individual has to keep in mind while claiming the deductions under Section 80RRB.

  1. An individual can claim a deduction of up to Rs 3 lakh. If their income is more than Rs. 3 lakh then the deduction under royalty can’t go beyond that. If his royalty income is less than 3 lakh then he will get a deduction on that income under Section 80RRB.
  2. An individual can’t club the income of other sources with royalty income. It means that they can claim a deduction only for the amount he is receiving from royalty.
  3. Individuals who do not hold the original patent are not eligible for tax benefit under section 80RRB of Income Tax Act 1961.
  4. If an individual earns royalty income from outside India then the deduction under section 80RRB can only be claimed within six months from the end of last year. It is compulsory to produce documentary evidence to the Income-tax department to avail the benefit of deduction under section 80RRB. If you don’t produce the document then you are not eligible to get the deduction.
  5. Only those assessee can claim the benefit of tax deduction who fulfill the criteria of the resident. A non-resident individual can’t claim the deduction under Section 80RRB of Income Tax Act 1961.
  6. In respect of granting the patent, it is an agreement between the two parties but in some circumstances, the government grants the license to use patent for the public at large. In such a situation, the government will settle the amount of royalty with the controller who grants the patent right.

Computing Income By Way Of Royalties In Case Of Non-Residents (Section 44DA)

Section 44DA of Income Tax Act, 1961 deals with the Special provision of Income by way of royalties in the case of a non-resident.

Who Is a Non-Resident?

According to Section 6 of the Income Tax Act 1961, an assessee will be qualified as a non-resident if they satisfy any one of the following conditions:

  1. In a financial year, individual stay in India for less than 181 days; and
  2. In a financial year, individuals stay in India for not more than 60 days;
  3. If an individual stays in India which exceeds 60 days in a financial year but does not exceed 365 days or more during the 4 previous financial years.

Provision for computing income by way of royalty in case of non-resident Section 44DA

Section 44DA of Income Tax Act, 1961 talks about the provision for computing income by way of royalties in the case of the non-resident. If a non-resident receives an amount in pursuance of an agreement made before the 1st April 2003 it will be governed by Section 44DA of the Income Tax Act 1961. If a foreign company or a non-resident is earning the fee for technical service or royalty income from India through a permanent establishment in India then such fee for technical service or royalty shall be computed under the head “profits and gains of business or profession”.

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The Income Tax charges tax on all the five heads and it also provides a deduction on the same that can be claimed by the assessee to save the tax. There are many provisions under the Income Tax Act which talks about the deduction of tax when an individual is earning the income from royalty. An author has a right to claim a tax deduction under section 80QQB of Income Tax Act. The patentee can take the benefit of tax deduction under section 80RRB of Income Tax Act, 1961. However, If an individual is sharing the information and taking the royalty then that will not come under the royalty income.

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Taxation On Income From RoyaltyUnder Income Tax Act, 1961 (4)

FAQs

Is royalty taxable under income tax? ›

The payer or the user of the royalty or recipient of the technical service, may be the government or any other Indian concern. If the agreement is an eligible one, such income is taxed at a lower, preferential tax rate. Royalty/FTS for non residents are taxable in India if sourced in India.

Is royalty income from other sources? ›

It is assumed that you are a resident and ordinary resident (ROR) of India. Income/royalty from book sales can be categorized as income from other sources (IOS) or profits and gains from business and profession (PGBP).

How does royalty income get taxed? ›

Royalties from copyrights, patents, and oil, gas and mineral properties are taxable as ordinary income. You generally report royalties in Part I of Schedule E (Form 1040 or Form 1040-SR), Supplemental Income and Loss.

What is a royalty income? ›

The amount someone pays you to use your property, after you subtract the expenses you have for the property. Royalty income includes any payments you get from a patent, a copyright, or some natural resource that you own.

How much is the royalty tax? ›

The IRS treats the royalty income like any other income from employment or a business. You'd be responsible for paying tax on it based on your tax bracket. If you are single and only claim the standard tax deduction, your tax rate would be 22%.

What is the tax rate on royalty? ›

Royalty payments (taxable under the IT Act) are ordinarily subject to TDS @ 10% (plus surcharge and cess, as applicable) under the IT Act.

How is royalty income calculated? ›

The base formula for royalty calculation is royalty revenue = sales x royalty percentage. You can choose to keep things old school, and do the math for each and every SKU.

Is royalty income earned income? ›

Proceeds from the conversion of a resource are not income. Royalties are unearned income unless they are: received as part of a trade or business, or. received by a person in connection with any publication of the person's work (for example, from publication of a manuscript, magazine article or artwork).

What type of account is royalty income? ›

It is a nominal account and at the end of the accounting year, balance of Royalty account need to be transferred to the normal Trading and Profit & Loss account. Royalty, based on the production or output, will strictly go to the Manufacturing or Production account.

What are examples of royalties? ›

An example of the royalty structure could be that the author receives 15% on net sales of hardbacks and 7.5% on net sales of paperbacks. The satellite TV services such as Direct TV and cable television services pay networks and superstations a royalty fee to broadcast those channels on their systems.

What are the 4 royalties? ›

Specifically, there are four types of royalties (1) Mechanical Royalties, (2) Performance Royalties, (3) Synch Royalties, and (4) Print Music Royalties. To understand, royalties it is important to remember that every song has two copyrights associated with it.

Who is royalty? ›

Royalty may refer to: Any individual monarch, such as a king, queen, emperor, empress, etc. Royal family, the immediate family of a king or queen regnant, and sometimes his or her extended family. Royalty payment for use of such things as intellectual property, music, or natural resources.

How is royalty income treated? ›

A royalty is income derived from the use of the taxpayer's property. A royalty payment must relate to the use of a valuable right. According to the IRS, tax must be withheld on the payment of royalties from sources in the United States.

What are the provisions of income tax Act 1961? ›

Under Section 285BA of the Act, an inter alia assessee is required to furnish a statement of financial transaction to the income tax authority as may be prescribed. The relevant rule and form is Rule 114E and Form 61A. Certain transactions are to be reported as contained in the said form.

What is royalty deduction? ›

The section permits taxpayers to claim tax deductions on royalty earned from the sale of books. Only resident Indian authors are eligible to claim deduction under Section 80QQB. For claiming a deduction under the section, a maximum limit of Rs. 3 lakhs is applicable.

What percentage is royalty? ›

Royalty Rate For Services

The average royalty percentage applied to licensed services varies between 2-15 percent of the total buy, depending on the attractiveness of the property. Another (easier) way to work licensed service deals is to charge an annual fee for the licensee's right to use your intellectual property.

Who can get royalty income? ›

Royalty is a passive income stream, providing benefit to people who create intangible assets or work of art. Musicians owning music rights, cinema rights, and authors often grant the right to use their copyrighted material and earn income.

Is royalties direct or indirect? ›

Royalty on production is a direct expenses and to be debited to the manufacturing/trading account.

What is another name for royalty? ›

What is another word for royalty?
royalsmonarchs
sovereigntykingship
nobilityqueenship
aristocracyregality
regencysovereigns
7 more rows

How many royalties are there? ›

Royal families of the world

Of the 26 monarchies around the world, 12 are in Europe and 10 of those 12 are led by a royal family.

Where are royalties used? ›

Royalties are paid to the owner of particular property for the use of that property. They're commonly used in regard to intellectual property, particularly in the music, film, mining and publishing industries.

What are the 2 types of royalties? ›

When dealing with the composition or publishing portion of a copyright there are two main types of royalties: Public Performance and Mechanical. All of the money collected from the publishing portion of a song is split between the songwriter(s) and the publisher.

What are royalty rights? ›

More Definitions of Royalty Rights

Royalty Rights means rights to receive a percent of gross or net revenues that may be fixed or variable, may provide for a minimum or maximum dollar amount per year or in total, may be for an indefinite or fixed period of time, or may be based upon revenues in excess of a base amount.

What is a 5 percent royalty? ›

Royalty percentages: In most licensing agreements, the royalty rate is a percentage. So, if the royalty rate is 5%, then, for the duration of the licensing agreement, the licensee must pay the licensor 5% of the net of gross revenue generated by the intellectual property.

Why is it called royalty? ›

The term originated from the fact that in Great Britain for centuries gold and silver mines were the property of the crown; such “royal” metals could be mined only if a payment (“royalty”) were made to the crown.

What is the role of royalty? ›

The Sovereign acts as a focus for national identity, unity and pride; gives a sense of stability and continuity; officially recognises success and excellence; and supports the ideal of voluntary service. In all these roles The Sovereign is supported by members of their immediate family.

What is royalty account? ›

In terms of accounting, royalty is what a lessee pays to a lessor for the use of any rights, copyrights, franchises or any such asset. It is the system of sharing of revenues between the lessee and the lessor.

Is royalty income considered earned income? ›

Proceeds from the conversion of a resource are not income. Royalties are unearned income unless they are: received as part of a trade or business, or. received by a person in connection with any publication of the person's work (for example, from publication of a manuscript, magazine article or artwork).

Is royalty included in gross income? ›

Taxpayers must include rents and royalties payments in gross income.

Is royalty Trust income taxable? ›

Royalty trusts are a type of pass-through entity that is structured similarly to real estate investment trusts (REITs) and master limited partnerships (MLPs). As long as they distribute a certain level of profits to unit holders as distributions, they avoid paying federal income tax.

How is royalty income calculated? ›

The base formula for royalty calculation is royalty revenue = sales x royalty percentage. You can choose to keep things old school, and do the math for each and every SKU.

How do you earn royalty income? ›

Investing in Royalty Trusts

The easiest way to invest for royalty income is by purchasing shares of a royalty trust. These are publicly traded corporations that acquire ownership of rights to leases and deposits of oil, gas and minerals. The income generated from royalties is distributed to shareholders as dividends.

What are the 4 types of royalties? ›

When you release a new song, make sure you get the most for your work by understanding which of the four types of royalties apply to you. Between mechanical royalties, performance royalties, synch royalties, and print music royalties, it's entirely possible to make a decent living as a musician.

What type of account is royalty income? ›

It is a nominal account and at the end of the accounting year, balance of Royalty account need to be transferred to the normal Trading and Profit & Loss account. Royalty, based on the production or output, will strictly go to the Manufacturing or Production account.

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