Form 65 — Patent Royalty Taxation Election Under Section 194 Explained

The Income-tax Act, 2025 provides an optional concessional tax regime for income by way of royalty in respect of patents developed and registered in India. Under section 194(1) (Table: Sl. No. 2), an eligible patentee can opt for taxation of royalty income at the rate of 10% instead of the normal slab rates. Form 65 is the prescribed form for exercising this option. Understanding this form and its requirements is essential for patentees seeking to avail this benefit.

Overview of Section 194(1) Table Sl. No. 2

Statutory Provision

Section 194(1) (Table: Sl. No. 2) provides that income by way of royalty in respect of a patent developed and registered in India, received by a person resident in India who is a patentee (eligible assessee), shall be taxable at the rate of 10%.

Eligibility Conditions

The eligible assessee must be:

• A person resident in India
• A patentee (true and first inventor recorded as patentee under the Patents Act, 1970)
• In receipt of royalty in respect of a patent developed and registered in India

Key Features

• Tax Rate: 10% on royalty income
• No Deduction: No deduction in respect of any expenditure or allowance is allowed in computing the royalty income
• Option: The option for taxation at 10% must be exercised in the prescribed manner
• Validity: The option once exercised applies to subsequent years, but if not offered for taxation under this option for any of the five succeeding tax years, the assessee becomes ineligible for five years

Exclusions

The concessional rate does not apply if:

• The patent is not developed and registered in India
• The assessee is not a patentee
• The option is not exercised

Form 65 — Election for Taxation of Royalty Income

Purpose

Form 65 is the form for exercising the option for taxation of income by way of royalty in respect of a patent developed and registered in India at the rate of 10% under section 194(1) (Table: Sl. No. 2).

Filing Details

To Whom

• Assessing Officer having jurisdiction over the assessee

Timing

• On or before the due date specified in section 263(1)(c) for filing the return of income for the relevant tax year
• If the option is exercised for the first time, it must be exercised in the return of income for that tax year

Mode

• Electronic filing as specified by the Principal Director General of Income-tax (Systems)

Verification

• By the person authorised to verify the return of income under section 265

Line-by-Line Explanation

Part I: Basic Information

1. Name of the Assessee

   • Full legal name of the patentee

2. Permanent Account Number (PAN)

   • PAN of the assessee

3. Address

   • Residential or registered address

4. Tax Year

   • The tax year for which the option is exercised

Part II: Details of Patent

5. Patent Number

   • The patent number as granted under the Patents Act, 1970

6. Date of Grant of Patent

   • Date on which the patent was granted

7. Title of the Invention

   • Title of the invention as per the patent specification

8. Whether the Patent is Developed in India

   • Yes/No
   • At least 75% of the expenditure incurred for the invention must be in India

9. Whether the Patent is Registered in India

   • Yes/No
   • Registered under the Patents Act, 1970

10. Name of the Patentee

    • Name of the patentee as recorded in the patent register

11. Whether the Applicant is the True and First Inventor

    • Yes/No

Part III: Details of Royalty Income

12. Nature of Royalty

    • Consideration for transfer of all or any rights in the patent
    • Imparting of information concerning the working of the patent
    • Use of the patent
    • Rendering of services in connection with the above activities

13. Amount of Royalty

    • The amount of royalty received or receivable during the tax year

14. Date of Receipt

    • Date on which the royalty was received

15. Payer of Royalty

    • Name, address, and PAN (if available) of the payer

16. Whether TDS has been Deducted

    • Yes/No
    • If yes, the rate of TDS

Part IV: Option Exercise

17. Option Exercised

    • That the assessee opts for taxation of royalty income at the rate of 10% under section 194(1) (Table: Sl. No. 2)

18. Declaration

    • That the assessee is a resident in India
    • That the assessee is a patentee
    • That the patent is developed and registered in India
    • That the assessee will not claim any deduction in respect of expenditure or allowance in computing the royalty income

19. Signature and Date

    • Signature of the assessee
    • Date of signing

Conditions for Exercise of Option

Eligibility

• The assessee must be a patentee (true and first inventor recorded as patentee under the Patents Act, 1970)
• The patent must be developed in India (at least 75% of expenditure incurred in India)
• The patent must be registered in India under the Patents Act, 1970
• The assessee must be a resident in India

Option Exercise

• The option must be exercised on or before the due date for filing the return of income
• The option must be exercised in Form 65
• The option once exercised applies to subsequent years

No Deduction

The assessee shall not be allowed any deduction in respect of any expenditure or allowance in computing the royalty income. This includes:

• No deduction under sections 28 to 58, 60 and 61
• No deduction under section 93
• No deduction under Chapter VIII

Five-Year Rule

If the assessee does not offer its income for taxation as per the provisions of columns C and D of Table Sl. No. 2 for any of the five tax years succeeding the tax year in which the option is exercised, then such assessee shall not be eligible to claim the benefit for five tax years subsequent to the tax year in which such income has not been offered to tax as per such provisions.

Practical Considerations

Timing of Option

The option must be exercised in the return of income for the tax year for which it is claimed. The return must be filed on or before the due date.

Consistency

The option once exercised for a tax year applies to subsequent years. The assessee cannot opt out in one year and opt in again in another year without consequences.

Documentation

The assessee must maintain proper documentation to support the claim, including:

• Patent registration certificate
• Details of expenditure incurred for development of the patent
• Records of royalty income
• TDS certificates

Compliance with No Deduction

The assessee must ensure that no deduction is claimed in respect of expenditure or allowance in computing the royalty income.

Common Mistakes

1. Incorrect Eligibility

   • Not a patentee
   • Patent not developed in India
   • Patent not registered in India

2. Delay in Exercise of Option

   • Option not exercised on or before the due date

3. Claiming Deduction

   • Claiming deduction in respect of expenditure or allowance in computing the royalty income

4. Inconsistent Application

   • Not offering income for taxation under the option in subsequent years

5. Incomplete Form 65

   • Missing details in Form 65

Penalties for Non-Compliance

• Incorrect claim: Penalty under section 439 (under-reporting/misreporting)
• Failure to maintain records: Penalty under section 441

Expert Advisory

Given the complexity of the patent royalty taxation election, professional advisory is essential. Anuj Desai & Associates provides comprehensive services for patent royalty taxation, including:

• Eligibility Assessment: Determining eligibility for the concessional rate
• Form 65 Preparation: Preparation of Form 65
• Compliance Review: Review of compliance with section 194
• Representation: Representation before tax authorities

With deep expertise in taxation of intellectual property and royalty income, Anuj Desai & Associates ensures that your patent royalty taxation is optimised and compliant.

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Need expert assistance with patent royalty taxation or Form 65? Contact Anuj Desai & Associates today for comprehensive advisory, preparation, and compliance services. [Contact Us] to schedule a consultation.