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Deductions under Section 80RRB

Updated on: Apr 30th, 2024

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4 min read

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.

What is Section 80RRB?

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.

Amount of Deduction under Section 80RRB

The amount of deduction under section 80RRB is lower of the below amount:

  • Rs. 3 Lakh or
  • Actual royalty received

Example: 

Here is an example of how to calculate the deduction under Section 80RRB:

An individual receives a royalty income of Rs. 4 lakhs from a patent that he has developed. The individual's expenses related to the patent are Rs. 50,000.

  • The individual's net royalty income is Rs. 3.5 lakhs (Rs. 4 lakhs - Rs. 50,000).
  • The individual is eligible for a deduction of Rs. 3 lakhs under Section 80RRB.
  • The individual's taxable income is Rs. 50,000 (Rs. 3.5 lakhs - Rs. 3 lakhs).
  • The individual will have to pay tax on Rs. 50,000 at the applicable tax rates

Eligibility Criteria for Claiming Deductions under Sec 80RRB

One must satisfy the following criteria for claiming deductions against Section 80RRB: 

(i) The individual claiming the deduction should be a resident of India. HUF or Non-residents are not allowed to claim this deduction. 

(ii) The individual must opt for the old tax regime
(iii) Only individuals who hold an original patent are eligible to apply for a deduction under Section 80RRB. If an individual does not hold the original patent, he/she cannot apply for this deduction. 
(iv) The patent against which the royalty has been received must be registered under the Patent Act, 1970. The said patent must have been registered on or after 1st April 2003.

(v) To claim the deduction, the documents proving royalty payments must be produced.

(vi)The assessee must file the return of income to claim the deduction.

(vii) The taxpayer must furnish an online certificate in FORM No. 10CCE, signed by the relevant authority with the return of income.

(viii) Where a deduction for any previous year has been claimed and allowed in respect of any income referred to in this section 80RRB, no deduction in respect of such income shall be allowed under any other provision of the Act in any assessment year.

What is a Patent?

Indians are regarded as the most innovative brains in the world. Therefore, it is not uncommon to come across new innovations regularly. These innovators don’t just make life easier for Indian citizens but also for the world as a whole. The innovators apply for patents with relevant authorities, which confers on them the right to use the innovation for a given time period.

A patent is also known as an intellectual property right and ensures the innovator's rights are protected. This allows the innovator to monetize his/her innovation and generate regular income from it. When an innovator gives another person or entity the rights to use the patented innovation, in return, they receive a regular payment.

This payment is known as a Royalty payment. Usually, what happens is that the innovators do not have the means to develop their idea into an effective offering. In such a situation, an individual or entity takes the rights to use that innovation and then develops it into an effective product. In such a situation, that entity will pay the innovator a royalty amount against the rights to use the innovation commercially. It might be a fixed amount every year or a certain percentage of sales for a given period of time.

Examples of Patents:

  • Inventions
  • Designs
  • Processes
  • New methods of manufacturing
  • New applications of known methods or processes

Deductions under Sec 80RRB for Royalties received against a Patent

As specified earlier, the income received from Royalties is eligible for deductions under Section 80RRB. Following are some crucial points to be noted regarding this deduction: –

(i) One can claim a deduction of up to Rs. 3.00 Lakhs against royalty payments. This amount is the maximum amount that can be claimed as a deduction. If the actual royalties received are less than Rs. 3 Lakhs, then only that much amount would be eligible for deduction. 
(ii) In case the individual has another source of income, then only the amount received as royalty can be claimed as a deduction. 
(iii) Only original patent holders can claim the deduction under Section 80RRB. 
(iv) If the royalty payments are received from a foreign country, then the deduction can be claimed only with respect to the royalty payments received within 6 months of the completion of the financial year in which the income is earned. 
(v) It is important to produce documentary evidence of the royalty payments otherwise the claim could be rejected. 
(vi) This deduction is only available for resident individuals i.e. HUF or Non-residents cannot claim this deduction. 
(vii) The amount of royalty is usually settled between two parties as per a mutual agreement.

But in certain cases, the Government might grant a compulsory license to use the patent, in public interest. In such a scenario, the Controller of Patents of the Government will settle the amount of royalty payable. In this case, the deduction claimed cannot be more than the settlement amount. If you are also an innovator and hold a patent from the government for your innovation, then you can also claim deduction under Section 80RRB and save on your taxation liabilities.

Note: This deduction is allowed only if the assessee opts for the old tax regime.

Treatment of Royalty from foreign sources

When the income from royalty is earned from some foreign sources, the deduction can be claimed but with few more conditions. They are:

  • The income earned should be brought to India by the assessee in convertible foreign exchange.
  • The income earned should be brought into India within a period of 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 such other authority as is authorized.

Things to Remember While Claiming Deduction Under Section 80RRB

  • Section 80RRB allows for deductions only for resident individuals in India. Hindu Undivided Families (HUFs) and non-residents are not eligible to claim deductions under this particular section, as per the provisions of the law.
  • This deduction applies to income derived from royalties. It encompasses various activities such as transferring rights in a patent, providing information for the use or working of a patent, using a patent, and rendering services related to these activities. The deduction can be claimed for the income generated from these specific sources.
  • This deduction does not apply to any consideration received for the sale of a product manufactured using a patented process or patented article for commercial use. The deduction is specific to royalty income and does not cover income generated from the sale of such products..
  • Only the amount received as royalties from the alternate source of income is eligible for deduction. Other income sources are not considered for the purpose of claiming this deduction.
  • Deduction under Section 80RRB is exclusively available to original patent holders. Only individuals who hold the original patent are eligible to claim this deduction.
  • Taxpayers receiving royalty payments from foreign sources can claim a deduction under Section 80RRB. The deduction is available for the amount brought into India in convertible foreign exchange within 6 months from the end of the financial year. A prescribed certificate signed by the relevant authority is required to claim the deduction.
  • The royalty amount is typically determined through settlement or mutual agreement between the parties involved.
  • It is crucial to furnish documentary evidence of royalty payments to avoid potential denial of the claim.

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Frequently Asked Questions

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.

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