July 24, 2025 by Sarika Kumari
In the modern knowledge economy, patents are powerful business assets that generate substantial monetary value through royalty licensing, assignment, and technology transfer. However, any such monetization triggers tax implications, which vary by the nature of the transaction and the entity involved.
This article provides an in-depth legal and tax perspective on:
Tax treatment of patent-based royalty and assignment income in India
Section 115BBF and its benefits to resident inventors
Differences in tax liability for individuals vs companies
A comparative overview of global “Patent Box” regimes
Structuring tips for startups and IP holders
| Source of Income | Legal Nature (under Indian Tax Law) |
|---|---|
| Royalty Licensing | Income from licensing patent rights (Section 115BBF / 56) |
| Assignment / Sale | Capital Gains (Short-Term or Long-Term under Sec. 45) |
| Technology Transfer | Business Income / Professional Receipts (Sec. 28) |
| Internal Use in Business | Business Income with depreciation benefit (Sec. 32) |
Section 115BBF, Income Tax Act, 1961
Introduced via Finance Act, 2016 to incentivize innovation and retain IP in India
| Criterion | Requirement |
|---|---|
| Patent Registration | Must be granted under the Patents Act, 1970, in India |
| Taxpayer Status | Resident individual or HUF (companies not eligible) |
| Source of Income | Royalty from licensing (assignment excluded) |
| Territorial Scope | Patent must be Indian; foreign patents not covered |
| Tax Rate | Flat 10% (plus applicable surcharge and health cess) |
| Deductions Allowed? | No deduction for expenditure or allowances against such royalty |
Suppose Mr. A earns ₹10,00,000 as royalty from a licensed Indian patent. Tax payable under Section 115BBF:
₹10,00,000 x 10% = ₹1,00,000 (+ cess and surcharge)
There is no slab-based taxation, and the rate is final.
Treated as transfer of a capital asset (Sec. 2(14), 45)
Taxed as:
Short-Term Capital Gains (STCG): If held ≤ 36 months
Long-Term Capital Gains (LTCG): If held > 36 months
| Type | Tax Rate |
|---|---|
| LTCG | 20% with indexation benefit |
| STCG | As per individual’s tax slab rate |
Assignment ≠ royalty, and hence not covered under Sec. 115BBF.
Income derived from using your own patented technology is taxed as Business Income under Section 28.
Eligible deductions:
Depreciation on intangible asset (25% block rate under Rule 5)
R&D expenses, patent filing/prosecution costs (if capitalized)
| Country | Regime Name | Tax on Patent Income | Key Features |
|---|---|---|---|
| 🇮🇳 India | No formal Patent Box | 10% (individuals only) | Sec. 115BBF; only resident individuals, no deduction |
| 🇬🇧 UK | Patent Box | 10% | Applies to profits from patented inventions |
| 🇸🇬 Singapore | Pioneer Incentive | 10–15% | Incentivized for high-tech and R&D-heavy firms |
| 🇮🇪 Ireland | Knowledge Dev. Box | 6.25% | Applies to qualified IP income |
| 🇳🇱 Netherlands | Innovation Box | 7% | Applies to profits from innovative assets |
India’s regime applies only to individuals and does not offer a corporate innovation box like its OECD counterparts.
| Issue | Position under Indian Law |
|---|---|
| Can companies use Sec. 115BBF? | No – Only individuals/HUFs qualify |
| How is royalty taxed for companies? | At normal corporate tax rate (22% / 25%) |
| GST applicability? | Yes – Royalty may be treated as a supply of service under GST Act |
| TDS on royalty income? | Applicable under Sec. 194J or 195 if from foreign payer |
| Can companies depreciate patent? | Yes – As intangible asset (25% rate) |
While there is no specific Indian Supreme Court ruling on Section 115BBF, key principles from CIT v. B.C. Srinivasa Setty [(1981) 2 SCC 460] and Rama Medical Stores v. CIT help establish the treatment of intangible capital assets like patents under the capital gains regime.
Microsoft Corp. v. IRS (2018) – US court analyzed how international licensing income from software patents should be treated under the U.S. Internal Revenue Code and transfer pricing laws.
HMRC’s Patent Box Guidance establishes the framework for reducing tax on qualifying profits from patented inventions, laying ground for similar reforms in India.
| Document | Relevance |
|---|---|
| Patent Registration Certificate | To establish Sec. 115BBF eligibility |
| Licensing Agreement | Proof of royalty income |
| Royalty Receipts & Invoices | Required for GST and income tax audit |
| Development Records | To show the invention was self-developed |
| Bank Statements / TDS Certificate | For record of payment and tax deduction |
Register the patent in India – Foreign patents don’t qualify for concessional tax.
Maintain development logs – Crucial to prove self-development under 115BBF.
Use IP Holding Structures – Companies can assign patent to an IP-holding entity to separate risk and optimize tax across jurisdictions.
Evaluate Foreign Filing Jurisdictions – Prefer Patent Box nations (UK, Ireland) for long-term global strategy.
Consult Dual Experts – A combination of IP counsel and tax advisors is essential for effective structuring.
Your innovation deserves not only legal protection but also fiscal efficiency. Whether you're a solo inventor licensing your patented AI system, or a SaaS company integrating patented algorithms—the way your patent income is taxed can significantly affect your profits.
While India’s Section 115BBF provides a limited but attractive incentive, comprehensive planning—possibly across borders—is key. Use professional help to structure, register, and monetize smartly.
Q1. Can a company claim 10% tax under Section 115BBF?
👉 No. This concessional rate applies only to resident individuals or HUFs.
Q2. What if I earn patent income from a foreign country?
👉 Sec. 115BBF applies only to royalty from Indian registered patents. Foreign patent royalty is taxed under normal rates.
Q3. Is GST applicable on royalty licensing?
👉 Yes. If royalty is classified as supply of service, GST at 18% may apply under Sec. 9(1) of the CGST Act, 2017.
Q4. Can I structure a patent transfer to save capital gains tax?
👉 Potentially, through indexation, strategic timing, or tax treaties – professional guidance is critical.
Q5. Is the royalty taxed on receipt or accrual basis?
👉 Depends on your accounting method (mercantile vs cash basis). Income is generally taxable on accrual for businesses.