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What is Royalty and its type?

Royalty: It is an amount paid by lessee to lessor for using leased asset for fixed period. It is calculated on the basis of output produced or sold by using leased asset.

Types of Royalty:
·         Copyright Royalty: The publisher pays royalty to an author for publishing author creation.
·         Patent Royalty: The lessee uses the patent holder right and for that he has to pay royalty to patent holder.
·         Oil-well Royalty: The royalty paid by lessee to lessor for using oil well for fixed period.
·         Mine Royalty: The lessor leases the mine to lessee for fixed period of time and for extracting minerals from that mine the lessee has to pay royalty to lessor.
·         Brick making Royalty: The lessee has to pay an amount as royalty to lessor for using the land of the lessor.

Some terms use in Royalty:

1.       Minimum rent: It is also known as Dead rent or Fixed rent or Flat rent or Contract rate. In initial year of lease the production or sale is very low. The lessor receive very low or no royalty in those year. To make up this loss, the lessee has to pay minimum rent to lessor if royalty is less according to the contract between lessor and lessee. When production is more than initial year the lessee has to pay either the royalty or minimum rent whichever is higher. If in a contract there is no such word of minimum rent is mention then the lessee has to pay only royalty in all circumstances.

2.       Short-workings: In case the royalty paid by lessee is lower than the minimum rent then the lessee has to pay the remaining amount to lessor and that amount is known as short working. All that happens in initial years only. It is treated as loss to lessee and recorded in profit and loss account in that year.
Short – working = Minimum rent – Royalty

3.       Surplus: The excess amount of royalty over minimum rent is known as surplus. This situation occurs when the production is high enough to pay normal percentage of royalty.
Surplus = Royalty – Minimum Rent

4.       Recoupment of Short-workings: According to the lease contract the lessee has a right or may be not to recoup his short-working which is a loss for him from lessor.

       If in a contract lessee has a right to recoup his short-workings from surplus then there are some conditions in which lessee uses his right and the conditions are:
·         The lessee has a right to recoup his short-workings in the first few years for example the short-workings can only be recoup in first 3 years only and the lease started from January 2010 and the lessee can recoup his short-workings in 2010 only in 2010,2011 and 2012.

·         The lessee has a right to recoup his short-workings in next year only for example if lease started from January 2012 then the lessee has a right to recoup his short working in 2013 only.

·         The lessee has a right to recoup his short-workings in next few year only for example If lease started in January 2014 then the short-workings only be recoup in 2015,2016 only.


·         The lessee has a right to recoup his short-workings in whole life of lease year.

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