Oct 166 min read

Deductions under Section 80RRB: All That You Need to Know

Q: Q7. Do Hindu Undivided Families (HUFs) qualify for deductions under section 80RRB?

No, HUFs cannot claim tax deductions under section 80RRB. The deduction is only for individual residents of India.

Section 80RRB of the Income Tax Act was introduced to ensure that an individual doing exceptional work gets their reward. Royalty on the patent is an instance of a reward that should be encouraged so that individuals keep doing good work. Under this section, these individuals can claim deductions in their income tax against the payments received as royalty. The goal of the section is to boost patenting and innovation in India. In this comprehensive guide, we will explain the concept of patenting and the process of claiming a deduction with Section 80RRB.

Meaning of Patent

Innovation is a boon to a nation and society as a whole. However, innovators should enforce their exclusive rights on their inventions. For every new invention, they can seek a patent from relevant authorities. It gives them a right to let others use their invention for a specific time period. The patent application discloses the technicalities of the invention. As a patent protects the intellectual property right of the inventor, they can use it to generate regular income by giving others the authority to use it.

What is Royalty on Patents?

According to Tax Laws, royalty in terms of a patent is the consideration (which includes lump sum consideration but excludes any consideration for the sale of product manufactured using the patented process or article for commercial use or which is the income chargeable under the head "Capital gains”) for:

Transfer or any or all rights in respect of a patent (including the granting of a license) or
Use of any patent or
Imparting of any information regarding the use of or working of a patent or
Rendering of any services connected with the activities referred to in sub-clauses (i) to (iii)

The selling of these products or services generates income for a business. They pay royalty income to the innovator in return for their rights to use. Innovators get a fixed amount or an agreed percentage of sales annually until the rights are used. The amount of royalty is usually settled as per a mutual agreement between two parties.

What is Section 80RRB of the Income Tax Act?

As a citizen of India, you can generate income by pursuing any legal occupation or vocation. There are multiple avenues you can consider, from business to employment and profession. Royalty payments are also a source of income whereby a person can earn money by giving another party the rights for the usage of certain work produced by them. These include inventions, books, art, music, etc. These payments are recurring and cover a specified period until the death of the recipient. Anyone receiving royalty payments against their work is entitled to deductions under Section 80RRB of the IT Act, 1961.

Amount of 80RRB Deduction

The income received from royalties is eligible for deductions under Section 80RRB. Here are a few key facts regarding the 80RRB deduction:

A taxpayer can claim a deduction value up to a maximum of Rs. 3.00 Lakhs against royalty payments. Since this is the maximum amount, the actual amount will be eligible for deduction if the royalties received are less than Rs. 3 Lakhs.

Only the amount received as royalty is eligible for deduction if the individual has another source of income.

A deduction under Section 80RRB can be claimed only by original patent holders.

Only resident individuals are eligible for the deduction. It means HUF or non-residents cannot claim it.

Anyone seeking deduction under Section 80RRB must produce documentary evidence of the royalty payments to ensure that the claim is not rejected.

For royalty payments received from a foreign country, the deduction can be claimed only for the payments received within six months of the completion of the financial year when the income is earned.

In some cases, the government may give a compulsory license to use the patent in the interest of the public. The Controller of Patents of the Government settles royalty payable in this scenario. The deductions claimed in this case cannot be more than the settlement amount.

Eligibility Criteria for Section 80RRB Deduction

Anyone seeking deduction under Section 80RRB must satisfy the following criteria:

The individual should be a resident of India (HUF or Non-residents are exceptions).
The taxpayer must be an owner/co-owner of the patent, holding the original patent to apply for deduction under Section 80RRB.
The original patent should be registered with the Patent Act of 1970. The patent must be registered under the Patent Act after 31st March 2003
The patent holder must have the documents that validate the royalty payments.
The taxpayer can also claim a deduction for advance royalty, which is not returnable. However, anything chargeable in capital gains is not regarded as a royalty payment.
The assessee must file an income tax return.
The taxpayer must provide an online certificate in FORM No. 10CCE with their return. It should be signed by the relevant authority.

No double deduction is allowed. When a deduction for any previous year has been already claimed and allowed under section 80RRB, no deduction on such income shall be allowed under any other provision in any assessment year.

Treatment of Royalty from Foreign Sources

Not all royalty may be earned from within India. If an individual earns royalty from foreign sources, some additional conditions apply to the deduction claimed for it. These include:

They should bring the income to India in convertible foreign exchange.
They should bring the income to India within six months from the end of the previous tear when it is earned or within the time period given by the Reserve Bank of India (RBI) or such other authorized authority.

What is Section 80QQB Deduction?

Authors writing books give them to publishers to publish them and earn profit by selling them. In return, they pay an agreed percentage of profit or sales as a reward or compensation for writing books. Like patents, this reward or compensation is a royalty for writers. They need to pay tax on these payments under “Profit and Gains of Business or Profession” or “Other Sources”. However, they can claim a deduction on this income under 80QQB of the Income Tax Act, of 1961. The amounts eligible for this deduction are:

Income earned by authors for practicing their profession
Incomes earned as lump sum payments for assignment or grant of any of their interests in the copyright of a literary, artistic, or scientific book as royalty or copyright fees
Incomes received as advance payments of royalties/ copyright fees

However, there are a few exceptions to deductions under Section 80QQB of the Income Tax Act. Authors cannot claim them on royalties earned from newspapers, pamphlets, textbooks, journals, diaries, guides, or similar publications. Additionally, any royalty income received from another country has to be repatriated and brought to India within a specified time period to avail of the benefits of deduction under this section.

What is Section 80B?

Section 80B outlines the method for calculating the income tax liability of individuals under the Income Tax Act. It involves computing the total income of the assessee in the first place after allowing different deductions under various sections of the Act. The next step is to calculate the income tax payable according to the tax rates applicable for the relevant assessment year. While this section does not relate to a specific deduction, it enables taxpayers to claim all deductions they are eligible for.

Conclusion

Section 80RRB of the Income Tax Act enables taxpayers to save tax liabilities for royalties from patents. If you are an innovator inventing new things, you can get deductions under Section 80RRB along with exclusive rights on your innovation. It can lower your tax liability and set you up to maximize your savings while earning steady passive income.

FAQs

Q1. What is patent royalty income?

Patent royalty is the income received by an inventor from a third party to use a product or an idea conceptualized by them.

Q2. What is the benefit of Section 80RRB?

Section 80RRB enables innovators to claim a deduction on the royalty income for their innovations. With this deduction, they can lower their tax bill while making money from their patented intellectual property.

Q3. Who is eligible to claim a deduction under Section 80RRB?

The patent holders residing in India are eligible to claim a deduction under Section 80RRB on their royalty income from patents.

Q4. What amount can be deducted under Section 80RRB?

The maximum deduction that can be claimed under Section 80RRB is up to Rs 3 lakh or the actual royalty payment received, whichever is less.

Q5. How are royalties paid?

Royalties are paid according to a percentage of gross or net revenues earned from the use of an asset. Alternatively, it may be a fixed price per unit sold of an item. The percentage or amount is settled mutually between the parties. It may be a fixed amount every year or a percentage of sales for a given time period.