What Is Royalty Taxation in India?
Royalty taxation in India is the set of rules that decide when a non-resident's income from licensing a patent, trademark, design, know-how, industrial equipment or software to an Indian party is taxable in India, and at what rate. Under section 9(6) of the Income-tax Act, 2025 (section 9(1)(vi) of the Income-tax Act, 1961), royalty payable by the Government, by an Indian resident, or — in narrower circumstances — by a non-resident, is deemed to accrue or arise in India, regardless of where the licensor is based. Once income is deemed to be Indian-source, it is generally taxed at a flat 20% on the gross amount under section 207(2) of the Income-tax Act, 2025 (section 115A of the Income-tax Act, 1961), and collected upfront through tax deduction at source under section 393(2) (Table, Sl. No. 17; section 195 of the Income-tax Act, 1961).
For a foreign company licensing technology, a brand, or software into India, and for the Indian business paying that royalty invoice, getting this wrong carries a real cost on both sides. Under-deduction exposes the Indian payer to interest, penalty, and a disallowance of the expense claimed against its own taxable profit. Over-deduction denies the foreign licensor cash it was entitled to receive net of only the applicable treaty rate.
The Source Rule — Section 9(6)
Section 9(6)(a) deems royalty income to accrue or arise in India using a payer test combined with a utilisation test:
- Royalty payable by the Government is always deemed to arise in India.
- Royalty payable by a resident is deemed to arise in India, unless it is paid for a right, property or information used, or services utilised, for a business the resident carries on outside India, or for earning income from a source outside India.
- Royalty payable by a non-resident is deemed to arise in India only if the right, property or information is used, or the services are utilised, for a business the non-resident carries on in India, or for earning income from a source in India.
The practical effect: an Indian company paying a foreign licensor for IP used entirely in its Indian operations cannot avoid the deeming rule by routing the payment through a third country. The test looks at where the right is used, not at the payer's or payee's residence.
What Counts as Royalty
Section 9(6)(b) defines royalty broadly as consideration — including a lump sum, but excluding any amount taxable as capital gains — for:
- the transfer or grant of rights (including a licence) in a patent, invention, model, design, secret formula/process, or trademark;
- imparting information concerning the working or use of any of those rights;
- the use of a patent, invention, model, design, secret formula/process, or trademark;
- imparting technical, industrial, commercial or scientific knowledge, experience or skill;
- the use, or right to use, industrial, commercial or scientific equipment — except where the amount falls within section 61(2) (Table, Sl. No. 5), the presumptive scheme for a non-resident providing services or facilities, including plant and machinery on hire, for prospecting for or the extraction or production of mineral oils;
- the transfer or grant of rights in a copyright or in a literary, artistic or scientific work, including films, video tapes and radio-broadcasting tapes; and
- rendering services connected with any of the above.
Section 9(6)(c)(i) puts computer software squarely on this list: the transfer or grant of any right to use software, including by licence, is royalty "irrespective of the medium through which that right is transferred." Section 9(6)(c)(ii) adds that royalty status does not turn on whether the payer possesses or controls the right, uses it directly, or on where the right happens to be located.
The 20% Rate — Section 207(2) and the Software Carve-Out at Section 207(3)
Where a foreign company, or a non-resident who is not a company, receives royalty from the Government or an Indian concern under an agreement made after 31 March 1976 — and, for royalty not connected with a permanent establishment (see below), the agreement is either approved by the Central Government (where it is with an Indian concern) or falls within India's industrial policy — section 207(2) (Table, Sl. No. 1) of the Income-tax Act, 2025 (section 115A of the Income-tax Act, 1961) taxes that royalty at a flat 20% of the gross amount. No deduction is allowed against this income under section 207(5): the 20% is charged on the gross royalty, not on net profit.
Section 207(3) carves computer software out of the government-approval condition. Where the royalty under sub-section (2) is consideration for transferring or granting rights in computer software to a person resident in India (or copyright in a book to an Indian concern), the 20% rate in sub-section (2) still applies — but without needing the Central Government approval or industrial-policy condition that clauses (a) and (b) would otherwise require. In practice, software-licensing royalty is taxed at the same flat 20% whether or not the underlying licence agreement carries government approval.
Royalty Connected With a Permanent Establishment
The flat 20% regime is not universal. Under section 59 of the Income-tax Act, 2025 (section 44DA of the Income-tax Act, 1961), where the non-resident recipient carries on business in India through a permanent establishment, or performs professional services from a fixed place of profession in India, and the royalty is effectively connected with that establishment, the income is instead computed under the head "Profits and gains of business or profession" — at ordinary business-income rates rather than the flat 20% — though no deduction is allowed for expenditure not wholly and exclusively incurred for that establishment's business in India.
TDS on Royalty Payments
Any person paying royalty to a non-resident must deduct tax at source under section 393(2) (Table, Sl. No. 17; section 195 of the Income-tax Act, 1961), at the rates in force, at the time of credit or payment, whichever is earlier — there is no minimum-amount threshold below which withholding can be skipped. Where a DTAA caps the royalty rate below 20%, the payer may apply the lower treaty rate instead, but only once the non-resident furnishes a Tax Residency Certificate and Form 41 (formerly Form 10F). The Indian remitter's bank will also require Forms 145 and 146 (formerly Forms 15CA and 15CB) — a chartered accountant's certification of taxability and the applicable rate — before releasing the foreign remittance.
A separate rule bites if the non-resident recipient has no valid Permanent Account Number (PAN): under section 397(2)(b)(i) of the Income-tax Act, 2025 (section 206AA of the Income-tax Act, 1961), tax must then be deducted at the highest of the rate specified in the relevant provision, the rate or rates in force, or 20% — so a lower treaty rate is lost and withholding reverts to 20% purely because no PAN was furnished.
Software Payments — Why Engineering Analysis (2021) Still Matters
Section 9(6)(c)(i) treats a software licence as royalty under domestic law. But where a DTAA applies, and its royalty article (typically Article 12) defines royalty more narrowly — as consideration for the use of a copyright, not merely for a copyrighted article — the treaty definition can produce a different, more favourable answer, because the treaty is applied where it is more beneficial to the non-resident. In Engineering Analysis Centre of Excellence Pvt Ltd v CIT (Civil Appeal Nos. 8733-8734 of 2018, decided 2 March 2021), the Supreme Court answered the question before it, at paragraph 169, by holding that "the amounts paid by resident Indian end-users/distributors to non-resident computer software manufacturers/suppliers, as consideration for the resale/use of the computer software through EULAs/distribution agreements, is not the payment of royalty for the use of copyright in the computer software, and that the same does not give rise to any income taxable in India, as a result of which the persons referred to in section 195 of the Income Tax Act were not liable to deduct any TDS under section 195 of the Income Tax Act." The ruling turned on the absence of any transfer of the copyright itself: a reseller or end-user buying a shrink-wrapped or off-the-shelf software licence acquires a copyrighted product, not rights in the underlying copyright.
The practical consequence for a foreign software vendor selling standard, off-the-shelf licences into India through distributors or directly to end-users, where no copyright right is actually transferred, is a strong basis to argue that no royalty income arises and no TDS is due. But the outcome depends closely on the exact rights granted under the specific licence and on the wording of the applicable DTAA's royalty article — it is not a blanket exemption for every cross-border software payment, and should be confirmed for the specific contract before a payer stops withholding.
Practical Example
A German engineering firm licenses a standard, off-the-shelf CAD software product to an Indian manufacturer under a shrink-wrap end-user licence, for a fixed annual fee. Separately, it licenses a patented manufacturing process — with full rights to use, adapt and sublicense the underlying technology — to the same manufacturer, under an agreement approved as part of an industrial collaboration. The CAD licence, if no copyright right is transferred and the India-Germany DTAA's narrower royalty definition applies, may fall outside "royalty" under Engineering Analysis. The patent-process licence squarely fits section 9(6)(b)(i) and (ii) — transfer of rights in, and imparting information about, a patented process — and is taxed at 20% under section 207(2), subject to any lower rate available under the DTAA once a Tax Residency Certificate and Form 41 are on file.
Checklist for Foreign Licensors and Indian Payers
- Identify which limb of section 9(6)(b) the payment falls under — the answer changes depending on whether it is patent/trademark rights, know-how, equipment use, or software.
- Check whether a PE in India makes section 59 apply instead of the flat 20% under section 207(2).
- Confirm whether the applicable DTAA's Article 12 royalty definition is narrower than the domestic law definition, particularly for software.
- Collect the Tax Residency Certificate and Form 41 before applying a treaty rate below 20%.
- Confirm the recipient has furnished a valid PAN, or expect withholding to revert to 20% under section 397(2).
- Arrange Forms 145 and 146 with the remitting bank before the payment goes out.
Frequently Asked Questions
Can an Indian payer apply a DTAA rate lower than 20% without any paperwork?
No. A treaty rate below the domestic 20% is available only once the non-resident furnishes a Tax Residency Certificate from its home country and Form 41 (formerly Form 10F) with the prescribed particulars. Without these, the payer must withhold at the higher domestic rate under section 207(2), and the bank processing the remittance will also require Forms 145 and 146 before releasing funds.
Does the section 207(3) software carve-out mean software royalty is exempt from tax?
No. Section 207(3) only removes the requirement that the underlying agreement be government-approved before the flat rate in section 207(2) applies. The royalty is still taxed at 20% of the gross amount — the carve-out changes an eligibility condition, not the rate itself, and does not create any exemption.
Is royalty paid by one non-resident to another non-resident ever taxable in India?
Yes, but only if the right, property or information is used, or the services are utilised, for a business the paying non-resident carries on in India, or for earning income from an Indian source. Section 9(6)(a)(iii) applies the deeming rule to non-resident payers precisely in that situation, even though neither the payer nor the recipient is an Indian resident.
Does the Engineering Analysis ruling mean every cross-border software payment escapes Indian tax?
No. The Supreme Court's holding applies where the payment is genuinely for the resale or use of a copyrighted software product without any transfer of copyright rights, and where a DTAA with a narrower royalty definition applies. Software agreements that do transfer rights to reproduce, modify, or sublicense the software can still fall within the domestic-law definition of royalty under section 9(6)(c)(i).
How is royalty connected to a permanent establishment taxed differently?
Instead of the flat 20% gross-basis rate under section 207(2), royalty effectively connected with a non-resident's permanent establishment in India is computed under section 59 as business income, at ordinary rates applicable to that business, after allowable business expenses — though expenditure not wholly and exclusively incurred for that establishment is still disallowed.
See also: Technology Transfer Agreement, Section 393(2) — TDS on Payments to Non-Residents, and Withholding Tax.