All you need to know about Tax on Income from Patents

Introduction

In India, the government provides legal protection to inventors for their creations through the Patent Act, 1970. This act provides exclusive rights to the inventor for a period of 20 years from the date of filing a patent application. However, like any other income, income from patents is also taxable in India. This blog will provide an overview of the tax on income from patents in India, including what is patent, patent registration process.

What is a Patent?

A patent is a legal document granted to an inventor or assignee by the government, giving them the right to exclude others from making, using, or selling the invention for a specific period of time. The invention must be novel, non-obvious, and useful to qualify for a patent application. It provides the inventor with a legal monopoly over the invention, allowing them to profit from it.

What is the Patent Application Process in India?

The following is the patent application process:

• The patent application process in India starts with the filing of a patent application with the Indian Patent Office. The application can be filed either online or offline, and it must contain a description of the invention, the claims, and the drawings (if any).
• Once the application is filed, the patent office examines it to determine if it meets the requirements of the Patents Act, 1970.
• If the application is accepted, the patent is granted, and the patentee has exclusive rights to use, make, and sell the invention in India.
• The patent registration process in India can take up to 3-4 years from the date of filing the application.

The process of patent registration in India is a lengthy and complex one that can take several years. However, it is important to note that patent registration provides the patentee with legal protection against infringement, which can be a valuable asset for inventors and businesses.

What is Tax on Income from Patents?

Like any other income, income from patents is also taxable in India. The income from patents is taxed under the head “Income from Other Sources” in the Income Tax Act, 1961. The income from patents is taxed at a flat rate of 10% under section 115BBF of the Income Tax Act, 1961.

Section 115BBF of the Income Tax Act, 1961

Section 115BBF provides tax relief to inventors who receive income from patents. This section provides that income from patents shall be taxed at a lower rate of 10% instead of the normal rate of tax applicable to the taxpayer. The section applies to an individual who is a resident of India and a non-resident who has a business connection in India. The section applies to the following types of income:

• Royalty received by the inventor for the use of the patent
• Consideration received by the inventor for the transfer of the patent
• Consideration received by the inventor for the transfer of any rights in the patent

To comply with the provisions of Section 115BBF, the payer of royalty or fees is required to file Form 3CFA with the tax authorities. Under Section 80RRB of the Income Tax Act, a deduction is allowed from the income from patents earned by an individual who is a resident of India. The deduction is allowed for a sum equal to the lower than 3 lakh or the amount of income received as a royalty in respect of a patent registered on or after April 1, 2003. It is essential to note that this deduction is only available to individuals who are residents of India and not to companies or other entities.

Conclusion

The process of patent application and registration can be complex and time-consuming, but it provides patentees with legal protection against infringement. The income generated from patents is taxable under the Income Tax Act, 1961, and the tax rate is determined by the standard rates applicable to an individual or a company. Section 115BBF of the Income Tax Act, 1961, provides a lower tax rate of 10% for income generated from patents.