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Explanation 2, Section 9(1)(vi). Meaning of “royalty”

Royalty means consideration including any lump sum consideration (but excluding any consideration which would be the income of the recipient chargeable under the head “Capital gains”) for—

1.	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. (PIMDSfpTS)
2.	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;
3.	the use of any patent, invention, model, design, secret formula or process or trade mark or similar property;
4.	the imparting of any information concerning technical, industrial, commercial or scientific knowledge, experience or skill. (TICS)
5.	the use or right to use any industrial, commercial or scientific equipment but not including the amounts referred to in section 44BB (Oil Rig).
6.	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
7.	the rendering of any services in connection with the above activities.

Exception when royalty accrues or arise outside India. (Foreign income)
Payment is made by a resident person for the transfer of rights (including the granting of a licence) in respect of computer software supplied by a non-resident manufacturer along with a computer or computer-based equipment under any scheme approved under the Policy on Computer Software Export, Software Development and Training, 1986 of the Government of India.

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FAQs on Meaning of “Royalty” - Taxation - Income Tax for assessment (Inter Level)

1. What is the meaning of "royalty" in the context of taxation?

Ans. In the context of taxation, "royalty" refers to a payment made by one party (the licensee) to another party (the licensor) for the use of intellectual property, such as patents, trademarks, copyrights, or mineral rights. It is a form of compensation for the right to use or exploit these assets.

2. How are royalties taxed?

Ans. Royalties are typically taxed as ordinary income. The tax rate may vary depending on the jurisdiction and the specific tax laws in place. In some cases, a withholding tax may be applicable, which requires the payer of the royalty to deduct and remit a certain percentage to the tax authorities on behalf of the recipient.

3. Are there any exemptions or deductions available for royalty income?

Ans. Yes, there may be exemptions or deductions available for royalty income depending on the tax laws of the jurisdiction. Some countries may offer specific deductions for expenses related to the creation or production of the intellectual property. It is important to consult with a tax professional or refer to the specific tax laws applicable to your situation.

4. How is the taxation of royalties different for individuals and corporations?

Ans. The taxation of royalties can vary for individuals and corporations. In many cases, royalties received by individuals are subject to personal income tax rates, while royalties received by corporations may be subject to corporate tax rates. Additionally, there may be differences in tax treatment based on the residency status of the recipient.

5. Are there any international tax considerations for royalties?

Ans. Yes, there are international tax considerations for royalties, especially when the licensor and licensee are located in different countries. Double taxation treaties and transfer pricing rules may come into play to determine the tax liability and avoid double taxation. It is advisable to seek professional advice to ensure compliance with international tax regulations.

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Nov 16, 2024 Last updated

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