Patent Royalty Taxation Election

The Direct Tax Code (DTC) 2025 provides a highly concessional tax regime for income by way of royalty from patents developed and registered in India. Section 194(1) (Table: Sl. No. 2) allows eligible resident taxpayers to opt for a flat 10% tax rate on gross royalty income, without any deductions for expenditure or allowances. This guide explains the election process, the filing of Form 65, and the critical compliance requirements.

The Statutory Framework

Section 194(1) (Table: Sl. No. 2) — Concessional Taxation

Under the DTC, any person who is a resident in India and a patentee (referred to as an "eligible assessee") may opt for taxation of royalty income in respect of a patent developed and registered in India at a concessional rate of 10%.

The key features of this regime are:

Flat Rate: 10% tax on gross royalty income
No Deductions: No deduction in respect of any expenditure or allowance shall be allowed in computing the royalty income
Option-Based: The concessional regime applies only if the eligible assessee exercises the option in the prescribed manner
Lock-In: Once the option is exercised, the assessee is generally required to remain in this regime for the subsequent five tax years

Scope of "Royalty"

For the purposes of this provision, "royalty" in respect of a patent means consideration (including any lump sum consideration but excluding any consideration which would be the income of the recipient chargeable under the head "Capital gains" or consideration for sale of product manufactured with the use of patented process or the patented article for commercial use) for:

Transfer of all or any rights (including the granting of a licence) in respect of a patent
Imparting of any information concerning the working of, or the use of, a patent
Use of any patent
Rendering of any services in connection with the above activities

Eligibility Criteria

Who is an "Eligible Assessee"?

An eligible assessee must satisfy the following conditions:

Resident in India: The person must be a resident in India
Patentee: The person must be a patentee, meaning the true and first inventor of the invention whose name is entered in the patent register as the patentee under the Patents Act, 1970
Development in India: The patent must be developed and registered in India
75% Expenditure Test: At least 75% of the expenditure incurred for any invention in respect of which patent is granted must be incurred in India by the eligible assessee

What Constitutes "Developed"?

The term "developed" means at least 75% of the expenditure incurred in India by the eligible assessee for any invention in respect of which patent is granted under the Patents Act, 1970.

Form 65 — The Election Mechanism

Purpose of Form 65

Form 65 is the prescribed form used to opt for concessional taxation on royalty income from eligible patents. Under the previous Income-tax Act, 1961, this benefit existed under Section 115BBF and Form 3CFA.

Filing Requirements

Rule 134 of the Income-tax Rules, 2026 prescribes the procedure for exercising the option:

Form: Eligible assessees must furnish Form No. 65
Due Date: The form must be furnished on or before the due date specified under section 263(1)(c) for filing the return of income for the relevant tax year
First Return: The option must be exercised for the first of the returns of income which the person is required to furnish

Verification

Form 65 must be verified by the person who is authorised to verify the return of income of the assessee under Section 265.

The Five-Year Lock-In

Continuity Requirement

Once a taxpayer files Form 65 and opts for Section 194(1), they are generally required to remain in this concessional regime for the subsequent five tax years.

Consequences of Opting Out

If the eligible assessee does not offer its income for taxation as per the provisions of Section 194(1) (Table: Sl. No. 2) for any of the five tax years succeeding the tax year in which the option was exercised, then:

Such assessee shall not be eligible to claim the benefit of the provisions for five tax years subsequent to the tax year in which such income has not been offered to tax as per such provisions

Tax Implications

Rate of Tax

The income by way of royalty is taxed at 10% (plus applicable surcharge and cess).

No Deductions

No deduction in respect of any expenditure or allowance shall be allowed to the eligible assessee under any provision of the DTC in computing his income by way of royalty. This means the tax is computed on the gross royalty income, without any deductions for expenses incurred in earning the royalty.

Surcharge and Cess

The 10% rate is exclusive of surcharge and cess, which shall be levied as applicable.

Practical Considerations

When to File Form 65

For existing patent royalty income: File Form 65 on or before the due date for filing the return of income for the tax year in which the option is sought
For future patent royalty income: File Form 65 on or before the due date for filing the return of income for the first tax year for which the option is sought

Documentation Requirements

Assessees exercising the option should maintain:

Patent registration certificate
Evidence of development in India
Details of expenditure incurred in India
Royalty agreements
Proof of royalty receipts

Interaction with Tax Treaties

Where a Double Taxation Avoidance Agreement (DTAA) applies, the assessee may need to consider whether the concessional rate under the DTC or the treaty rate is more beneficial. However, once the option under Section 194(1) is exercised, the concessional regime applies.

Comparison with Previous Regime

Aspect	Section 115BBF (Old Act)	Section 194(1) (DTC)
Rate	10%	10%
Form	Form 3CFA	Form 65
Lock-In	Not specified	Five years
Development Test	75% in India	75% in India

Expert Legal Guidance

Anuj Desai & Associates provides comprehensive legal advisory services on patent royalty taxation and Form 65 compliance. Our direct tax experts help eligible assessees understand the concessional regime, file Form 65 correctly, and ensure ongoing compliance. We assist in determining eligibility, preparing documentation, and representing clients before income-tax authorities.

Disclaimer: This article provides general information and does not constitute legal advice. For specific guidance on patent royalty taxation or any other direct tax matter, please consult qualified legal professionals.

Need Expert Legal Guidance?

Navigating the patent royalty taxation framework requires experienced legal counsel. At Anuj Desai & Associates, we provide comprehensive direct tax advisory services, including:

Form 65 Filing: Assistance with Form 65 preparation and filing
Eligibility Assessment: Evaluation of eligibility for concessional taxation
Compliance Advisory: Guidance on ongoing compliance requirements
Representation: Representation before income-tax authorities

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Patent Royalty Taxation Election — Form 65 and the Section 194 Option