How India Taxes IP Royalty Payments to Non-Residents
When an Indian company pays royalties to a non-resident for the use of intellectual property — whether patents, trademarks, copyrights, software licences, or proprietary know-how — India asserts the right to tax that income at source. This is one of the most consequential tax events for foreign companies operating in India through a subsidiary, because the withholding tax is an immediate cash outflow that must be managed carefully to avoid double taxation and compliance penalties.
India's right to tax royalties paid to non-residents is grounded in two key provisions of the Income Tax Act:
- Section 9(1)(vi): Deems royalty payable by an Indian resident to a non-resident as income that accrues or arises in India, establishing India's taxing right regardless of where the IP was developed or where the non-resident is located
- Section 195: Requires the Indian payer to deduct income tax at source before making any payment to a non-resident that is chargeable to tax in India
The practical effect is that the Indian subsidiary must withhold tax from every royalty payment before remitting the net amount to the foreign parent. The withheld amount is deposited with the Indian government, and the foreign parent claims credit for it in its home country tax return (subject to home country rules).
What Constitutes a "Royalty" Under Indian Tax Law
India defines "royalty" more broadly than many other jurisdictions. Under Section 9(1)(vi), royalty includes consideration for:
- Patents and inventions: Any payment for the right to use a patent, invention, model, design, or secret formula or process
- Trademarks and brand names: Licence fees for using trademarks, trade names, service marks, or brand identities
- Copyrights: Payments for the transfer or use of copyrights, including literary, artistic, and scientific works
- Software licences: Payments for the right to use computer software (though recent judicial developments have narrowed this in certain contexts)
- Know-how and technical information: Payments for imparting information concerning industrial, commercial, or scientific knowledge, experience, or skill
- Use of industrial or scientific equipment: Consideration for the use of, or right to use, any industrial, commercial, or scientific equipment (excluding payments that constitute income from property)
This broad definition means that many cross-border payments that might not be classified as royalties in other jurisdictions — such as software licence fees, technical documentation charges, or access to proprietary databases — may be treated as royalties under Indian law and subject to withholding tax.
Domestic Withholding Tax Rate: The 20% Rule
Effective April 1, 2023, the domestic withholding tax rate on royalties and fees for technical services (FTS) paid to non-residents was doubled from 10% to 20% (plus applicable surcharge and cess). This increase, introduced through the Finance Act 2023, significantly raised the cost of IP remittances from India.
Current Effective Rates (FY 2025-26)
| Non-Resident Type | Base Rate | Surcharge | Health & Education Cess | Effective Rate |
|---|---|---|---|---|
| Foreign company (income up to INR 1 crore) | 20% | Nil | 4% | 20.80% |
| Foreign company (income INR 1-10 crore) | 20% | 2% | 4% | 21.22% |
| Foreign company (income above INR 10 crore) | 20% | 5% | 4% | 21.84% |
| Non-corporate non-resident | 20% | Varies | 4% | 20.80-23.92% |
These are the default rates under domestic Indian law. However, if a Double Taxation Avoidance Agreement (DTAA) exists between India and the non-resident's country, the lower of the domestic rate or the DTAA rate applies.
DTAA Treaty Rates: Country-Wise Royalty Withholding Tax
India has signed DTAAs with over 90 countries, and most of these treaties prescribe lower withholding tax rates on royalties than the domestic 20% rate. Using the correct DTAA rate can save foreign companies 5-10 percentage points on every royalty remittance.
Key DTAA Royalty Rates
| Country | DTAA Royalty Rate | Applicable Article | Key Conditions |
|---|---|---|---|
| United States | 15% | Article 12 | Beneficial owner must be US resident; Tax Residency Certificate required |
| United Kingdom | 10-15% | Article 13 | 10% for use of industrial, commercial or scientific equipment; 15% for other royalties and FTS |
| Germany | 10% | Article 12 | Beneficial owner condition; no PE in India |
| Japan | 10% | Article 12 | Standard conditions; TRC required |
| Singapore | 10% | Article 12 | Limitation of Benefits (LOB) clause applies |
| Netherlands | 10% | Article 12 | Standard beneficial owner condition |
| Australia | 10-15% | Article 12 | 10% for copyright; 15% for industrial equipment |
| Canada | 10-15% | Article 12 | 10% for copyright; 15% for patents and know-how |
| France | 10% | Article 13 | Standard conditions |
| South Korea | 10% | Article 12 | Standard conditions |
| UAE | 10% | Article 12 | Standard conditions; TRC from UAE authorities required |
| China | 10% | Article 12 | Standard conditions |
To claim the lower DTAA rate, the non-resident recipient must provide a Tax Residency Certificate (TRC) from the tax authority of their country of residence, along with a valid PAN (Permanent Account Number) in India or Form 10F if PAN is not available. Without these documents, the Indian subsidiary must withhold tax at the higher domestic rate of 20%.
Section 195 Compliance: The Withholding Process
Every royalty payment from an Indian entity to a non-resident triggers Section 195 compliance. The process is precise and must be followed exactly to avoid penalties.
Step-by-Step Withholding Process
- Determine taxability: Confirm that the payment is chargeable to tax in India under Section 9(1)(vi). If the payment qualifies as a royalty under Indian law, it is taxable.
- Identify the applicable rate: Compare the domestic rate (20% plus surcharge and cess) with the DTAA rate (if a treaty exists). The lower rate applies, but only if the non-resident provides a valid TRC and PAN/Form 10F.
- Deduct TDS before payment: The Indian subsidiary must deduct TDS at the time of credit to the non-resident's account or at the time of payment, whichever is earlier. This means TDS must be deducted even on accrual, not just on actual remittance.
- Deposit TDS with government: Pay the deducted TDS using Challan No. 281 by the 7th of the following month (30th April for March deductions).
- File TDS return: File quarterly TDS return in Form 27Q within the prescribed due dates.
- Issue TDS certificate: Issue Form 16A to the non-resident within 15 days of filing the quarterly TDS return.
Lower Withholding Certificate Under Section 197
If the non-resident believes the effective tax rate should be lower than the statutory rate (for example, if expenses can be deducted from the gross royalty), they can apply to the Assessing Officer for a lower withholding certificate under Section 197. This is particularly relevant when the non-resident has incurred significant costs in developing the IP that is being licensed to the Indian subsidiary.
Form 15CA and 15CB: The Remittance Gateway
No Indian bank will process an outward royalty remittance without completed Form 15CA and Form 15CB. These forms serve as the tax clearance mechanism for foreign remittances.
When Each Form Applies
| Scenario | Form Required | CA Certificate Needed? |
|---|---|---|
| Remittance is not chargeable to tax (e.g., exempt under DTAA or not income) | Form 15CA Part A | No |
| Remittance is chargeable but lower withholding certificate obtained (Section 195/197) | Form 15CA Part B | No |
| Remittance exceeds INR 5 lakh and is chargeable to tax | Form 15CA Part C | Yes (Form 15CB) |
| Remittance is below INR 5 lakh and chargeable to tax | Form 15CA Part D | No |
Form 15CB Certification Process
For most royalty payments, Form 15CB certification by a Chartered Accountant is required. The CA must verify and certify:
- The nature of the remittance and its taxability under Indian law
- The applicable DTAA, if any, and the treaty rate
- Whether a valid TRC and PAN/Form 10F have been provided by the non-resident
- The amount of TDS deducted and the challan details
- Whether the remittance complies with FEMA regulations
The CA uploads Form 15CB on the Income Tax e-filing portal. The remitter then files Form 15CA Part C, linking it to the 15CB acknowledgment number, and submits the signed form to the authorized dealer bank before the remittance is processed.
Transfer Pricing Implications of Royalty Payments
Royalty payments between associated enterprises are among the most scrutinized transfer pricing transactions in India. The Indian tax authorities frequently challenge whether the royalty rate is at arm's length and whether the Indian subsidiary actually benefits from the licensed IP.
Common Transfer Pricing Challenges
- Excessive royalty rates: The tax authorities compare the royalty rate with rates in comparable third-party licence agreements. Rates exceeding 2-5% of net sales for trademarks or 5-8% for technology licences face heightened scrutiny.
- Benefit of IP to Indian operations: The authorities may argue that the Indian subsidiary has developed its own local goodwill and does not derive proportionate benefit from the parent's trademark or brand.
- Marketing intangibles: If the Indian subsidiary incurs significant advertising, marketing, and promotion (AMP) expenses beyond routine levels, the tax authorities may argue that the subsidiary is developing marketing intangibles for which it should be compensated, offsetting the royalty obligation.
- Bundled transactions: When royalties are combined with technical service fees or management fees, the tax authorities may unbundle the transaction and benchmark each component separately.
Benchmarking Approaches
The CUP method using comparable licence agreements from databases like RoyaltyRange or ktMINE is the preferred approach. When comparable CUP data is unavailable, the TNMM applied to the Indian subsidiary's overall profitability (after the royalty payment) is commonly used. The subsidiary must demonstrate that even after paying the royalty, it earns a profit margin consistent with comparable independent enterprises performing similar functions.
Structuring Royalty Arrangements for Tax Efficiency
Within the boundaries of Indian law and applicable DTAAs, several structuring strategies can legitimately reduce the withholding tax cost on IP royalty payments.
Treaty Shopping Prevention
India has included Limitation of Benefits (LOB) and Principal Purpose Test (PPT) clauses in its newer DTAAs and applies the General Anti-Avoidance Rules (GAAR) to aggressive treaty shopping arrangements. Routing royalties through a low-tax jurisdiction solely to access a favourable DTAA rate without economic substance will be challenged.
Legitimate Structuring Options
- Split royalty and service components: If the payment includes both a licence fee and technical support, splitting them into separate components with appropriate benchmarking may allow different tax treatments
- Cost contribution arrangements: Instead of a one-way royalty, structuring the relationship as a cost contribution arrangement where the Indian subsidiary shares in both the costs and benefits of IP development can reduce the taxable royalty component
- Outright purchase vs. licence: In some cases, purchasing IP outright (capitalized and amortized in India) may be more tax-efficient than ongoing royalty payments, particularly for technology IP with a limited useful life
- Advance Pricing Agreements: For significant recurring royalty payments, filing for a bilateral Advance Pricing Agreement with the CBDT locks in the accepted royalty rate for up to 9 years (5 prospective + 4 rollback)
Recent Developments and the Income Tax Act 2025
The Income Tax Act, 2025 (effective April 1, 2026) reorganizes the provisions governing royalty taxation under Chapter 10, aligning more closely with OECD principles. Key changes include:
- Clarified royalty definition: The new Act refines the definition of royalty to address digital economy considerations, including payments for data access and cloud computing services
- Strengthened source rules: Section 9 of the new Act tightens the attribution rules for income deemed to accrue or arise in India, with updated royalty and FTS provisions
- Block TP assessment: Royalty rates accepted as arm's length in one year can be applied to the following two years under the new block assessment framework
- Enhanced GAAR provisions: The anti-avoidance framework is strengthened, making it riskier to use intermediary entities solely for treaty benefit shopping
Foreign companies should review their existing IP licensing arrangements with Indian subsidiaries to ensure they remain compliant under the new framework, particularly if their current structures rely on interpretive positions that may shift under the 2025 Act.
Key Takeaways
- India's domestic withholding tax on IP royalties is 20% (plus surcharge and cess), significantly increased from the pre-2023 rate of 10%, making DTAA treaty planning essential for cost management
- Most DTAAs reduce the rate to 10-15% — for example, 10% under India-Germany, India-Japan, India-Singapore, and India-Netherlands treaties; 15% under India-US for patents and know-how
- Every royalty remittance requires Form 15CA/15CB certification, TDS deposit on Challan 281, quarterly TDS return in Form 27Q, and Form 16A issuance to the non-resident
- The non-resident must provide a valid Tax Residency Certificate and PAN (or Form 10F) to claim the lower DTAA rate; without these, the 20% domestic rate applies
- Royalty rates are heavily scrutinized under transfer pricing rules — maintain a robust benchmarking study and contemporaneous documentation to defend the arm's length nature of the royalty
- Engage FEMA compliance and tax advisory specialists to structure IP licensing arrangements that optimize withholding tax while remaining fully compliant with Indian transfer pricing, FEMA, and anti-avoidance provisions
Frequently Asked Questions
What is the current withholding tax rate on royalties paid to non-residents from India?
The domestic withholding tax rate is 20% (plus applicable surcharge and health & education cess of 4%), effective from April 1, 2023. However, if a DTAA exists between India and the non-resident's country, the lower treaty rate applies. Most DTAAs prescribe rates of 10-15% for royalties.
What documents does the non-resident need to claim a lower DTAA rate on royalties?
The non-resident must provide a valid Tax Residency Certificate (TRC) issued by the tax authority of their country of residence, along with either a PAN (Permanent Account Number) in India or a completed Form 10F. Without these documents, the Indian company must deduct TDS at the higher domestic rate of 20%.
Is Form 15CB mandatory for every royalty remittance?
Form 15CB (CA certificate) is mandatory when the royalty remittance exceeds INR 5 lakh in a financial year and the payment is chargeable to tax. For remittances below INR 5 lakh, Form 15CA Part D can be filed without a CA certificate. For non-taxable remittances, Form 15CA Part A applies without a CA certificate.
Can the non-resident apply for a lower withholding rate on royalties?
Yes. Under Section 197, the non-resident can apply to the Assessing Officer for a lower or nil withholding certificate if they believe the effective tax rate should be less than the statutory rate — for example, if they can deduct expenses incurred in developing the IP from the gross royalty income.
How does India's transfer pricing affect royalty payments?
Royalty payments between associated enterprises must be at arm's length price. The Indian tax authorities frequently challenge excessive royalty rates, typically scrutinizing rates above 2-5% of net sales for trademarks and 5-8% for technology licences. The CUP method using comparable licence agreements is preferred for benchmarking.
What is the India-US DTAA royalty withholding rate?
Under the India-US DTAA (Article 12), royalties are subject to a withholding rate of 15% for patents, know-how, and industrial royalties. For copyright royalties on literary, artistic, or scientific works, the rate may be 10%. The beneficial owner must be a US tax resident with a valid TRC.
When must TDS on royalties be deposited with the Indian government?
TDS deducted on royalty payments must be deposited using Challan No. 281 by the 7th of the month following the month in which the deduction was made. For deductions made in March, the deadline is April 30. Late deposit attracts interest at 1.5% per month under Section 201(1A).