To foster innovation and creativity, governments globally incentivise individuals and entities for their contributions to intellectual property. In India, one such incentive is provided under Section 80RRB of the Income Tax Act, which allows for deductions on income derived from patent royalties. This provision encourages the development and commercialisation of patented inventions by providing tax benefits to patent holders.
What is Section 80RRB?
Royalty income from patents refers to the money earned by inventors when others use their newly patented creations, which could be anything from books and inventions to music and art. These payments occur regularly for a set period. If you’re someone in India who receives such income for your innovations, you can get tax deductions under section 80RRB of the Income Tax Act, 1961.
Meaning of Patent
Indians are widely recognised as the most innovative minds globally, regularly introducing new inventions. These innovators not only improve the lives of Indian citizens but also contribute to advancements worldwide. To safeguard their creations, innovators apply for patents, which grant them the exclusive right to use their innovation for a specified duration.
A patent, also termed an intellectual property right, serves as a protective shield for innovators, ensuring their rights are upheld. This protection enables innovators to monetise their innovations, generating consistent income streams. When an innovator grants another individual or entity permission to utilise their patented innovation, they receive periodic payments in return, known as royalty payments.
Innovators may need more resources to develop their ideas into marketable products. In such cases, an individual or entity acquires the rights to utilise the innovation and transforms it into a viable product. In exchange for commercial usage rights, the entity pays the innovator a royalty fee, a fixed annual amount or a percentage of sales over a defined period.
What is Royalty Income on a Patent?
Royalty income on a patent refers to the payments the patent holder receives for allowing another party to use, manufacture, or sell the patented invention. These payments are typically made periodically based on the terms agreed upon in a licensing agreement or contract.
When an innovator allows another person or entity to utilise their patented invention, they receive compensation known as royalty income on the patent. Typically, the innovator conceptualises an idea, while other entities leverage this idea to create functional products for commercial use. The revenue generated from the sale of these products becomes income for the business entity. In exchange for granting usage rights, innovators receive royalty income, a fixed sum or a percentage of sales annually until the rights expire.
Amount of Deduction under Section 80RRB
Under Section 80RRB, an individual is eligible for a deduction of the royalty income from patents, subject to certain conditions. The deduction is equal to the least of the following amounts:
- Actual royalty received: The total royalty income the individual receives during the financial year.
- ₹ 3,00,000: This is the maximum limit prescribed for deduction under Section 80RRB.
Who is Eligible to Claim Deductions Under Section 80RRB?
To qualify for a deduction under Section 80RRB, several conditions must be met:
1. Documentation of Royalty Payments: Evidence of royalty payments must be provided to claim the deduction.
2. Filing of Income Tax Return: The taxpayer must file an income tax return to avail of the deduction.
3. No Double Deduction: If a deduction has been claimed and allowed for any income under Section 80RRB in a previous year, no deduction for the same income shall be permitted under any other provision of the Income Tax Act in subsequent assessment years.
4. Ownership of Patent: The taxpayer must be the owner or co-owner of the patent and hold an original patent to qualify for the deduction. Ownership of an original patent is necessary for eligibility.
5. Patent Registration: The original patent held by the taxpayer must be registered under the Patent Act of 1970.
6. Residency Requirement: Only individuals who are residents of India can claim this deduction. Hindu Undivided Families (HUF) or non-residents are not eligible.
7. Royalty Receipt after March 31, 2003: The taxpayer must receive a royalty for a patent registered under the Patent Act after March 31, 2003. This includes advance royalty that is non-returnable. Income classified as capital gains is not considered royalty.
8. Submission of Form No. 10CCE: Along with the income tax return, the taxpayer must submit an online certificate in FORM No. 10CCE, signed by the relevant authority.
Treatment of Royalty from a Foreign Source
When royalty income is derived from foreign sources, claiming the deduction entails additional conditions:
- Conversion to Indian Currency: The income earned as royalty must be brought into India by the assessee in convertible foreign exchange.
- Time Limit for Repatriation: The income earned as royalty should be brought into India within 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 another authorised authority.
Things to Remember While Claiming Deduction Under Section 80RRB
When claiming a deduction under Section 80RRB, specific vital points should be kept in mind:
1. Consideration of Royalty Income: Only the amount received as royalties from alternative income sources qualify for a deduction. Other income streams are not considered for this purpose.
2. Documentation: Furnishing documentary evidence of royalty payments is crucial to avoid potential denial of the claim. Proper documentation strengthens the claim’s validity and ensures compliance with regulations.
3. Eligibility Criteria: Deductions are only available for resident individuals in India. Hindu Undivided Families (HUFs) and non-residents cannot claim deductions under this section.
4. Exclusion of Product Sales: Income from selling products manufactured using patented processes or articles for commercial use is not eligible for this deduction. It is solely applicable to royalty income and excludes proceeds from product sales.
5. Exclusive to Patent Holders: Deductions under Section 80RRB are exclusively available to original patent holders. Only individuals possessing the original patent can claim this deduction.
6. Foreign Royalty Payments: Taxpayers receiving royalty payments from foreign sources can claim a deduction under Section 80RRB. The deduction is contingent upon bringing the amount into India in convertible foreign exchange within six months from the financial year’s end. A prescribed certificate signed by the relevant authority is necessary to claim the deduction.
7. Scope of Deduction: This deduction applies specifically to royalty income. It covers various patents-related activities, such as transferring patent rights, providing information on patent use, using patents, and related services.
8. Determining Royalty Amount: Royalties are typically determined through settlement or mutual agreement among the parties involved.
Final Words
Section 80RRB is a significant incentive for individuals engaged in innovation and research by providing tax benefits on income derived from patents. By encouraging the commercialisation of inventions, this provision not only rewards creativity but also promotes economic growth and technological advancement in the country. However, adhering to the prescribed conditions and maintaining compliance with tax laws to avail of the benefits under Section 80RRB is essential.