What is Royalty?

A royalty is a payment made to the legal owner of an asset, such as a patent, copyright, or natural resource, for the right to use that asset. It is typically calculated as a percentage of the revenues generated from using the asset.

For Startups: A tech startup might license a piece of technology from a university and pay a royalty on the sales of products that use that technology. In accounting, royalty payments are recorded as an operating expense. Payments for royalties, especially to foreign entities, are subject to Tax Deducted at Source (TDS) in India.

Example: A mobile game developer uses a popular music track in their game and agrees to pay the music label a 5% royalty on all in-game purchases.