Section 80RRB of Income Tax Act, 1961 TAX CONCEPT

Section 80RRB was introduced to ensure that someone who has done exceptional work gets their reward. In order to encourage individuals to keep producing good work, this section allows them to claim deductions in their income tax against payments received as royalty.

As a lawful citizen of India, you have the right to pursue any legal occupation or vocation to generate income. There are multiple avenues from which you can make money including business or employment. One such source of income for many citizens is Royalty payments. Royalty is an amount paid to a person by another party against the usage of certain work produced by the recipient.

This could include books, art, music, inventions etc. Royalty payments are usually recurring and can range from a specified period until the death of the recipient. If you also fall under this category and receive royalty payments against your work, you can claim deductions under Section 80RRB of the Income Tax Act, 1961.

Section 80RRB of Income Tax Act, 1961 provides a tax deduction for individuals who earn income from royalty on patents. Available to be claimed only under the old tax regime, this section is designed to encourage innovation and reward individuals who contribute to technological advancements by granting them financial benefits through tax deductions. The primary aim of Section 80RRB is to encourage innovation by providing financial incentives to those who develop and register patents.

What is Patent?

Innovation is appreciated as a valuable activity in our country. When someone invents something new, they receive exclusive rights from the authorities known as a patent. This patent gives them the power to allow others to use their invention for a limited time and the innovator can also earn regular income. The details of the invention are disclosed in the patent application, and the patent protects the innovator’s intellectual property rights. Examples of patents include inventions, designs, processes, new methods of manufacturing and new applications of known methods.

Tax law defines “royalty” related to a patent as payment (including lump sums, but not capital gains or payments for products made using the patented process) for:

Transferring any rights related to the patent, including licensing.
Providing information on how to use or work the patent.
Using the patent itself.
Offering services connected to any of the above activities.

Amount of Deduction under Section 80RRB

Under Section 80RRB, the amount deduction is the lesser of the following:

₹3 lakhs, or
Income earned from royalty of patent

Consider the following example-

Suppose an individual earns ₹4 lakhs in royalty income from a patent they developed. Their expenses related to the patent amount to ₹50,000.

The net royalty income is ₹3.5 lakhs (₹4 lakhs – ₹50,000).
The individual can claim a deduction of ₹3 lakhs under Section 80RRB.
The remaining taxable income is ₹50,000 (₹3.5 lakhs – ₹3 lakhs).
The individual will pay tax on ₹50,000 according to the applicable tax rates.

Eligibility Criteria to Claim Section 80RRB

The individual must be a resident of India. Non-residents and Hindu Undivided Families (HUFs) are not eligible.
Only those who are co-owner of the patent or hold the original patent can claim this deduction.
The patent must be registered under the Patent Act, 1970, and should have been registered on or after 1st April 2003.
Proof of royalty payments must be submitted to claim the deduction.
The individual must file an income tax return to avail of this benefit.
A certificate in Form 10CCE, signed by the relevant authority, must be furnished with the income tax return.
If a deduction has been claimed for any income under Section 80RRB in a previous year, it cannot be claimed again under any other section in subsequent assessment years.

Deductions from Royalty against Patent

You can claim up to ₹3 lakhs as a deduction for royalty payments. However, if your actual royalty income is less than ₹3 lakhs, you can only deduct the actual amount received.
Only the royalty income is eligible for this deduction.
Only the original patent holders can claim this deduction under Section 80RRB.
If the royalty is received from a foreign country, the deduction can only be claimed if the income is brought into India within six months of the end of financial year.
You must provide proof of the royalty payments to claim the deduction.
This deduction is only available to resident individuals.
Royalty amounts are agreed upon between two parties. However, in some cases, the government might issue a compulsory license for public interest, where the Controller of Patents will decide the royalty amount and then the deduction can’t exceed the government-set amount.
This deduction is only available if you opt for the old tax regime.

Deductions from Royalty from Foreign Sources

If royalty income is earned from foreign sources, you can still claim a deduction under Section 80RRB, but with some additional conditions:

The income must be brought into India in convertible foreign currency.
This income must be brought into India within six months from the end of the financial year in which it was earned, or within the timeframe specified by the Reserve Bank of India (RBI).

How to Avail Deductions Under Section 80RRB?

Step 1: Confirm your eligibility: verify that you are a resident of India and the original holder of the patent.

Step 2: Calculate the deduction amount: check whether the deduction is at least the amount received in royalty in that financial year or 3 lakhs.

Step 3: Gather all necessary documents proving the royalty payments.

Step 4: File Income Tax Return: include Form 10CCE and any other required documents and ensure that you are opting for the old tax regime.

Step 5: Review and verify your details before submission. Submit your income tax return before the due date.

Avoid double documentation. If you have claimed a deduction under Section 80RRB in a previous year, you cannot claim a deduction for the same income under any other section in coming years.

Things You Should Know While Claiming Section 80RRB

The tax deduction applies specifically to royalty income, including activities like transferring patent rights, providing patent-related information, using a patent, and related services.
This section does not cover income from the sale of products made using patented processes or articles.
The royalty amount is usually agreed upon between parties, and proper documentation is essential to validate the claim.
Only original patent holders or co-owners can claim this deduction.
Section 80RRB offers deductions exclusively for resident individuals in India. HUFs and non-residents cannot claim this benefit.

FAQs

Do Hindu Undivided Families (HUFs) qualify for tax deductions under section 80RRB of the Income Tax Act, 1961?

No, the HUFs are not qualified for tax deductions under section 80RRB of the Income Tax Act, 1961

What is the upper limit for tax deduction under section 80RRB of the Income Tax Act?

Under section 80RRB of the Income Tax Act, 1961, tax deductions of a maximum of Rs. 3,00,000 are allowed.

Is it possible to claim tax deductions under this section for the royalty amount received from a foreign source?

Yes, the royalty amount received from a foreign source can be claimed for tax deductions under section 80RRB of this section.

What advantages are available under section 80RRB?

Inventors can avail tax deductions on the royalty income received for their patented inventions under section 80RRB.

How long do royalties last?

The tenure of royalties depends on the terms of tenure given in the royalty clause in a lease agreement.

Is deduction under 80RRB allowed under the New tax regime?

No, deduction under 80RRB is only allowed if the assessee opts for the old tax regime.

What is the upper limit for tax deduction under section 80RRB of Income Tax Act?

The maximum tax deduction allowed under Section 80RRB of Income Tax Act, 1961, is ₹3,00,000.

What advantages are available under section 80RRB?

Inventors can claim tax deductions on the royalty income earned from their patented inventions under Section 80RRB.

How long do royalties last?

The duration of royalties depends on the terms specified in the royalty clause of the lease agreement.