Key Highlights
- Royalty definition in ITA 2025: payments for use of patents, trademarks, copyrights, software, designs, secret formulas, knowhow, etc.
- Resident receiving royalty: taxed at slab rate as "Profits and Gains of Business" or "Other Sources"
- Non-resident receiving royalty from India: TDS at 20% (Section 396) or lower DTAA rate
- Software payments: classified as royalty — landmark SC ruling (Engineering Analysis Centre of Excellence)
- DTAA: many treaties cap royalty withholding at 10-15%
- Section 35 equivalent: deduction for technology and patent fees in business
Legal Reference
Section 2(76) (definition of royalty), Sections 396, 397 (TDS on royalty to non-residents), ITA 2025 | SC judgment: Engineering Analysis Centre of Excellence v CIT 2021 (software as royalty) | Corresponds to Section 9(1)(vi), 115A of ITA 1961
1. Definition of Royalty Under ITA 2025
Royalty under Section 2(76) of ITA 2025 includes payments for:
- Use of patents, inventions, designs, models, trademarks
- Use of literary, artistic, or scientific work (copyright)
- Use of secret formulas, processes, or information
- Supply of technical, industrial, commercial, or scientific knowhow
- Use of computer software (per amended definition post-Finance Act 2012)
- Transmission by satellite, cable, or optical fibre (broadcasting)
2. Resident Royalty Recipient
For resident individuals and entities receiving royalty:
- If royalty is from a business activity: taxable as "Business Income" under PGBP head
- If royalty is passive (e.g., an author licensing book rights): taxable as "Income from Other Sources"
- Applicable deductions: expenses incurred to earn royalty income (Section 37); standard deduction not available
- Tax at applicable slab rate (individual) or corporate rate (company)
3. Non-Resident Royalty: TDS Under Section 396
When an Indian payer pays royalty to a non-resident:
- TDS at 20% under Section 396 (plus applicable surcharge and cess)
- If DTAA exists between India and the non-resident country: DTAA withholding rate applies (usually 10-15%)
- The non-resident must provide TRC (Tax Residency Certificate) and Form 10F to claim DTAA benefit
- Section 115A equivalent: flat 20% tax (or lower DTAA rate) on royalty — no deduction available
4. Software Payments: Royalty or Not?
The Supreme Court in Engineering Analysis Centre of Excellence v CIT (2021) held that payments for off-the-shelf software licences (such as buying Windows licences) are NOT royalty — they are sale of goods. However, CBDT has not fully implemented this, and software development contracts, customised software, and source code access continue to be treated as royalty. Specific facts determine the classification.
5. Common DTAA Royalty Rates
| Country | DTAA Royalty Rate |
|---|
| USA | 15% |
| UK | 15% |
| Germany | 10% |
| Singapore | 10% |
| Netherlands | 10% |
| Japan | 10% |
6. Why TaxClue
Royalty income classification, TDS compliance, and DTAA claim require careful analysis. TaxClue advises on royalty income structuring and files TDS returns and ITRs. Contact us for royalty taxation advisory and TDS compliance under ITA 2025.
Disclaimer
This article is for general informational and educational purposes only. It does not constitute legal, financial, or professional tax advice. Readers are advised to consult a qualified Chartered Accountant or tax professional before making any decisions. TaxClue Consultech Pvt Ltd accepts no liability. All case studies and examples in this article are illustrative only and do not represent actual persons or transactions.
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❓ Frequently Asked Questions
How is royalty income taxed for residents?
For resident individuals and businesses, royalty income is taxed at the applicable slab rate or corporate rate. If royalty arises from a business activity (e.g., a patent holder actively licensing technology), it is taxed as business income under the PGBP head. Passive royalty (e.g., an author licensing book rights without active involvement) is taxed as Income from Other Sources. Expenses incurred to earn royalty are deductible under Section 37.
What is TDS on royalty paid to a non-resident?
When an Indian payer (company, individual, or any person) pays royalty to a non-resident, TDS must be deducted at 20% under Section 396 of ITA 2025, plus applicable surcharge and cess. If India has a DTAA with the non-resident country, the DTAA withholding rate (usually 10-15%) applies — provided the non-resident provides a Tax Residency Certificate (TRC) and Form 10F. Most major DTAAs cap royalty withholding at 10-15%.
Is software payment royalty?
It depends. The Supreme Court in Engineering Analysis Centre of Excellence v CIT (2021) ruled that payment for off-the-shelf software licences (standard commercial products like Windows) is payment for goods, not royalty — and is not subject to TDS. However, payments for customised software, source code access, development agreements, or exclusive licences may still qualify as royalty. CBDT has clarified specific situations through circulars. Each transaction must be evaluated on its facts.
What is included in the definition of royalty?
Under Section 2(76) of ITA 2025, royalty includes payments for: use of patents, inventions, trademarks, and designs; use of copyright in literary, artistic, or scientific works; use of secret formulas or processes; transfer of technical, industrial, or scientific knowhow; use of computer software (as amended); and broadcasting via satellite or cable. The definition is broad and includes consideration for granting the right to use — not just outright purchase.
How can a non-resident claim the lower DTAA royalty rate?
To claim the lower DTAA rate on royalty income, the non-resident must provide the Indian payer with: (1) a Tax Residency Certificate (TRC) from the tax authority of the country of residence; and (2) Form 10F if the TRC does not contain all required information. With these documents, the Indian payer deducts TDS at the DTAA rate instead of the domestic 20%. The non-resident must also have a PAN or provide other prescribed details to facilitate TDS at the lower rate.
