Parth Shah
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Parth Shah
Register Valuer | CA | CPA | 15+ Years of Experiance
Parth Shah is the Founder and Team Leader of the company, bringing extensive expertise in business valuation and financial advisory.
Intangible assets now account for more than 80% of enterprise value in knowledge-driven businesses. Patents protect proprietary technology. Trademarks carry brand equity built over years. Customer relationships represent recurring revenue that a buyer is willing to pay a premium to acquire. Yet these assets rarely appear on a traditional balance sheet at their true worth unless a proper valuation is done.
The Relief from Royalty Method is one of the most widely accepted techniques for valuing intangible assets. It is used by valuation professionals, auditors, and tax authorities in India for Purchase Price Allocation (PPA) exercises, statutory valuations under the Companies Act 2013, and transfer pricing documentation under the Income Tax Rules 1962.
The logic is direct: if you own an intangible asset, you avoid paying royalties to license it from someone else. The present value of those avoided royalty payments is the value of the asset.
This guide explains how the Relief from Royalty Method works, how to apply it under India’s regulatory framework, and how to calculate it step by step with a worked INR example.
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Book a Free ConsultationKey Takeaways
- The Relief from Royalty Method values an intangible asset as the present value of royalty payments the owner avoids by owning the asset rather than licensing it from a third party.
- It is the most commonly used approach for valuing patents, trademarks, proprietary technology, and brand names in India and globally.
- The method is accepted under Ind AS 38 (Intangible Assets), Ind AS 113 (Fair Value Measurement), and Ind AS 103 (Business Combinations) for PPA exercises.
- Under Section 247 of the Companies Act 2013, statutory intangible asset valuations must be conducted by an IBBI (Insolvency and Bankruptcy Board of India) Registered Valuer.
- Selecting the correct royalty rate is the most judgment-intensive step: a 1 to 2 percentage point change in rate can shift the valuation by 20 to 30 percent.
- For cross-border IP transactions, royalty rates must satisfy the arm’s length standard under Rule 10B of the Income Tax Rules 1962.
- The method produces a defensible, market-anchored valuation because it draws on observable royalty data from comparable licensing agreements.
- My Valuation provides IBBI-certified intangible asset valuation services for PPA, M&A, fundraising, and statutory compliance across India.
What Is the Relief from Royalty Method?
The Relief from Royalty (RFR) Method is a valuation technique that estimates the fair value of an intangible asset by calculating the present value of the royalty payments the owner avoids by holding the asset outright.
The core assumption is this: if a company did not own a particular intangible asset, it would need to license it from a third party and pay royalties for the right to use it. By owning the asset, the company is “relieved” of that obligation. The value of the asset equals the present value of those avoided payments over its useful life.
The RFR method is a hybrid of the income approach and the market approach to valuation. It applies market-observable data (comparable royalty rates from real licensing transactions) to projected revenue streams (an income-based framework). This dual nature makes it credible in the eyes of statutory auditors, tax authorities, and regulators.
As per Ind AS 113, the RFR method produces a Level 3 fair value measurement since it involves significant unobservable inputs. However, the use of comparable market royalty rates introduces a Level 2 element, which strengthens the defensibility of the output considerably.
How Does the Relief from Royalty Method Work? Step-by-Step Process
Every RFR valuation follows a structured six-step sequence. Each step requires professional judgment, particularly the royalty rate selection and the choice of discount rate.
Step 1: Identify and Define the Intangible Asset
Clearly define what is being valued. Is it a registered trademark, a specific drug patent, a proprietary technology platform, or an acquired customer list? The asset’s legal nature, registration status, and remaining useful life all shape the valuation inputs.
Step 2: Project Revenue Attributable to the Asset
Estimate the future revenue directly linked to the intangible asset. For a trademark, this is the branded product revenue. For a patent, it is the revenue generated by the patented product or process. Revenue projections should be grounded in historical performance and realistic growth assumptions.
Step 3: Select the Appropriate Royalty Rate
This is the most critical and judgment-intensive step. The royalty rate must reflect what an arm’s-length licensee would pay for the right to use this specific asset. Sources for royalty rate benchmarking include:
- Published licensing databases such as RoyaltySource and Ktmine
- Comparable royalty rates disclosed in public filings and merger documents
- Industry-specific benchmarks by sector and asset class
- Transfer pricing databases for cross-border IP transactions involving Indian entities
As a reference, the table below shows typical royalty rate ranges by asset type in India:
Asset Type | Typical Royalty Rate Range |
Pharmaceutical patents | 3% to 8% |
FMCG trademarks and brand names | 1% to 5% |
Proprietary technology and software | 5% to 15% |
Customer relationships and contracts | 1% to 3% |
These are indicative ranges only. The specific rate applied in a valuation must be justified with comparable evidence and documented clearly.
Step 4: Calculate Pre-Tax Royalty Savings
Multiply the projected revenue by the selected royalty rate to derive the annual pre-tax royalty saving:
Pre-Tax Royalty Saving = Revenue x Royalty Rate
Step 5: Apply the Tax Adjustment
Since royalty payments are generally tax-deductible, the benefit of avoiding them must be restated on an after-tax basis:
After-Tax Royalty Saving = Pre-Tax Royalty Saving x (1 – Tax Rate)
The applicable corporate tax rate for domestic companies in India under Section 115BAA of the Income Tax Act 1961 (the concessional regime) is 25.17%, inclusive of surcharge and cess. Standard rate companies use 34.94%.
Step 6: Discount to Present Value Using WACC
Future after-tax royalty savings are discounted to present value using the Weighted Average Cost of Capital (WACC) or a risk-adjusted discount rate appropriate for the asset:
PV of Year n = After-Tax Royalty Saving / (1 + WACC)^n
For assets with a finite useful life (such as patents), the valuation sums the discounted savings over the remaining life. For assets with an indefinite useful life (such as trademarks), a terminal value is added using the Gordon Growth Model beyond the explicit forecast period.
Worked Example: Relief from Royalty Method in INR
Hypothetical Scenario: Drug Patent Valuation for PharmaX Pvt. Ltd.
PharmaX Pvt. Ltd., a mid-size Indian pharmaceutical company, is being acquired. As part of the PPA exercise under Ind AS 103, the acquirer must recognize all identifiable intangible assets at fair value. One asset is a drug patent for a generic formulation with five years of remaining useful life.
Inputs:
- Revenue attributable to the patent: INR 40 crore per year (flat across remaining useful life for simplicity)
- Benchmark royalty rate (pharma generics sector, supported by comparable licensing data): 4%
- Corporate tax rate: 25% (rounded for illustration)
- WACC: 15% (reflecting pharmaceutical sector risk profile)
Step-by-step calculation:
Pre-Tax Annual Royalty Saving: INR 40 Cr x 4% = INR 1.60 Crore
After-Tax Annual Royalty Saving: INR 1.60 Cr x (1 – 0.25) = INR 1.20 Crore
Year | After-Tax Royalty Saving (INR Cr) | Discount Factor @ 15% | Present Value (INR Cr) |
Year 1 | 1.20 | 0.870 | 1.04 |
Year 2 | 1.20 | 0.756 | 0.91 |
Year 3 | 1.20 | 0.658 | 0.79 |
Year 4 | 1.20 | 0.572 | 0.69 |
Year 5 | 1.20 | 0.497 | 0.60 |
Total | INR 4.03 Crore |
Estimated Fair Value of Patent: INR 4.03 Crore
This value would be recognized on the acquirer’s balance sheet as an identifiable intangible asset under Ind AS 38, as part of the PPA journal entry under Ind AS 103.
A sensitivity check is essential: if the royalty rate were 5% instead of 4%, the after-tax annual saving rises to INR 1.50 Crore and the estimated value increases to approximately INR 5.04 Crore, a 25% increase. This is why independent benchmarking of the royalty rate is non-negotiable.
How Is the Relief from Royalty Method Applied to Different Asset Types?
How Are Patents Valued Using the Relief from Royalty Method?
A patent grants its owner the exclusive right to exploit a technology or product for a defined statutory period (generally 20 years from the filing date in India, under the Patents Act 1970). The RFR valuation uses the remaining useful economic life of the patent, which may be shorter than the remaining legal life if the technology is expected to become obsolete earlier.
Royalty rates for patents vary considerably by sector. Pharmaceutical formulation patents typically attract rates between 3% and 8%. Process patents in manufacturing sectors may carry rates of 1% to 3%. The rate must be benchmarked against comparable licensing agreements in the same technology category.
In India, patent amortization for Income Tax purposes is governed by Section 35 of the Income Tax Act 1961, which governs scientific research expenditure. The tax treatment of the amortization affects the net present value of the royalty savings in some valuation contexts.
How Are Trademarks and Brand Names Valued?
Trademarks and brand names typically have indefinite useful lives, provided the owner actively uses and protects them. This means the RFR model must include a terminal value component calculated using the Gordon Growth Model beyond the explicit forecast horizon.
Brand royalty rates in India generally range from 1% to 5% of branded revenue, depending on brand strength, sector, and degree of consumer recognition. The Duff and Phelps Royalty Rate Study and sector-specific licensing databases are widely referenced in Indian PPA exercises. For FMCG, technology, and pharmaceutical companies, brand valuation using the RFR method is increasingly required in M&A transactions and Ind AS 103-compliant financial reporting.
How Is Proprietary Technology and Software Valued?
Proprietary technology includes internally developed software, algorithms, databases, and platforms. The royalty rate for technology assets is typically higher than for trademarks, reflecting scarcity and limited market availability. Rates of 5% to 15% are common depending on the uniqueness of the technology.
The useful economic life of technology assets is often shorter than that of brand names, typically three to seven years, due to the risk of technological obsolescence. This shorter life materially affects the terminal value assumption and requires conservative assumptions.
How Are Customer Relationships Valued?
Customer relationships represent the contractual or non-contractual ties between a business and its customers. Under Ind AS 103, acquired customer relationships must be separately identified and measured at fair value if they meet the identifiability criteria of Ind AS 38.
The RFR method can be applied to customer relationships by modeling revenue from existing contracts and applying a notional royalty rate based on comparable customer relationship licensing analogies. However, the Multi-Period Excess Earnings Method (MEEM) is more commonly used for customer relationships in India because it more directly captures the cash flows attributable to the asset and accounts for contributory charges from other assets.
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Explore our Intangible Asset Valuation ServicesComparing Intangible Asset Valuation Methods: How Does RFR Measure Up?
The Relief from Royalty Method is one of several approaches used in India for intangible asset valuation. The right method depends on the type of asset, the purpose of the valuation, and the availability of data.
Method | Approach Type | Best Suited For | Key Input Required | India Standard |
Relief from Royalty (RFR) | Income and Market | Patents, trademarks, brand names, technology | Royalty rate benchmarks plus revenue projection | Ind AS 38, Ind AS 103, Ind AS 113 |
Multi-Period Excess Earnings Method (MEEM) | Income | Customer relationships, developed technology | Revenue, margins, contributory asset charges | Ind AS 103 (PPA standard) |
Replacement Cost Method | Cost | Databases, assembled workforce, custom software | Cost to recreate the asset | Rule 11UA for specific tax valuations |
With-and-Without Method (WWM) | Income | Non-compete agreements, customer contracts | Revenue scenarios with and without the asset | Ind AS 113 Level 3 fair value |
Incremental Cash Flow | Income | Technology with quantifiable revenue uplift | Detailed cash flow projections | Widely accepted under Ind AS 113 |
The RFR Method is preferred for assets commonly licensed in the market because it anchors the valuation in observable market data. For assets with direct, measurable cash flows such as customer contracts, MEEM is often more appropriate. Most PPA exercises in India use a combination of RFR and MEEM across the full intangible asset portfolio of the acquired entity.
Regulatory Framework for Intangible Asset Valuation in India (2026)
India’s regulatory environment for intangible asset valuation has matured considerably. The following standards and rules govern how intangible assets must be valued.
Ind AS 38: Intangible Assets
As per Ind AS 38, an intangible asset must be identifiable, controlled by the entity, and capable of generating future economic benefits. The standard requires that intangible assets acquired in a business combination be measured at fair value at the acquisition date. This is precisely where the Relief from Royalty Method is applied.
Ind AS 38 also prescribes the useful life of intangible assets, distinguishing between finite-life assets (amortized over their useful life) and indefinite-life assets (not amortized but tested annually for impairment). The distinction directly affects how the RFR model is structured.
Ind AS 113: Fair Value Measurement
Ind AS 113 defines fair value as the price that would be received to sell an asset in an orderly transaction between market participants at the measurement date. It establishes a three-level hierarchy based on the observability of inputs. The RFR method generally produces a Level 3 fair value since royalty rates and useful life assumptions involve significant judgment. The use of comparable market royalty rates from licensing databases introduces a Level 2 element, which improves the defensibility of the result.
Ind AS 103: Business Combinations and Purchase Price Allocation
Under Ind AS 103, the acquirer in a business combination must recognize all identifiable intangible assets at fair value on the acquisition date. This statutory requirement drives the majority of RFR-based valuations in India. PPA exercises for acquisitions in the pharmaceutical, technology, FMCG, and consumer goods sectors regularly apply the RFR method to brand and patent valuation. Failure to separately recognize intangible assets at fair value can result in audit qualifications.
Section 247 of the Companies Act 2013 and IBBI Registered Valuers
Under Section 247 of the Companies Act 2013, valuations for statutory purposes must be conducted by an IBBI Registered Valuer. As per the IBBI (Registered Valuers and Valuation) Rules 2017, the valuer is personally responsible for the accuracy and integrity of the report. Intangible asset valuations required in the context of mergers, demergers, schemes of arrangement, or preferential allotments under the Act must be signed by an IBBI Registered Valuer with the Securities or Financial Assets (SFA) or the Plant and Machinery or Land and Building registration, depending on the asset class.
Transfer Pricing and Cross-Border Royalties (Rule 10B, Income Tax Rules 1962)
When an Indian subsidiary pays royalties to a foreign affiliate for the use of patents or trademarks, those payments must satisfy the arm’s length standard under Rule 10B of the Income Tax Rules 1962. The Comparable Uncontrolled Transaction (CUT) method, recognized under Rule 10B, directly aligns with the royalty rate benchmarking step of the RFR method. Transfer pricing audits in India frequently scrutinize royalty rates paid by Indian entities. A well-documented RFR analysis provides the evidentiary basis needed to defend the rate before the Income Tax Department.
FEMA Compliance for Cross-Border IP Transfers
When an Indian company transfers IP to or receives IP from a foreign entity, compliance with FEMA (Foreign Exchange Management Act) and the Foreign Exchange Management (Non-Debt Instruments) Rules 2019 is required. The valuation of the IP for FEMA purposes must use an internationally accepted methodology on an arm’s length basis. The Relief from Royalty Method satisfies this requirement and is accepted by Authorized Dealer banks and the Reserve Bank of India for such transactions.
When Should You Use the Relief from Royalty Method?
The RFR method is most appropriate in these situations:
- The intangible asset is commonly licensed in the market, making comparable royalty rate data available
- The asset supports identifiable revenue streams that can be projected with reasonable confidence
- The valuation is for a PPA exercise, M&A transaction, or financial reporting purpose under Ind AS
- The valuation must comply with a regulatory standard such as Ind AS 103, IBBI statutory requirements, FEMA guidelines, or transfer pricing rules
- The asset has a defined or estimable useful economic life
The method is less appropriate when:
- No comparable royalty data exists for the specific asset type
- The asset does not generate independent revenue (for example, an internally used administrative database)
- The cost to recreate the asset is the more relevant economic measure, in which case the Replacement Cost Method is preferred
- The asset’s value derives primarily from business synergies rather than from standalone royalty income
What Are the Common Mistakes When Applying the Relief from Royalty Method?
- Using an unsupported royalty rate: Selecting a rate from a different industry or using a single comparator without adequate support is the most consequential error. The royalty rate must be documented with specific comparable transactions, and the selection rationale must withstand audit scrutiny.
- Ignoring the tax amortization benefit (TAB): In specific contexts, particularly for US GAAP valuations or certain Indian tax valuations, the deductibility of the amortization of the intangible asset adds value to the calculation. Omitting the TAB can understate the asset’s fair value.
- Misjudging useful life: Using the full statutory life of a patent rather than its economic useful life overstates value. Technology assets can become economically obsolete long before their legal protection expires. The economic useful life requires separate judgment.
- Double-counting contributory assets: The RFR method assumes the entity already possesses all other assets necessary to generate the projected revenue. If the contributory charges from tangible assets, working capital, and other intangibles are not properly deducted, the isolated royalty saving attributable to the specific asset will be overstated.
- Failing to reconcile with the purchase price: In a PPA exercise, the sum of the fair values of all identified assets plus goodwill must equal the total purchase consideration. If individual asset valuations are inflated, the reconciliation will fail and trigger audit flags.
Conclusion
Intangible assets are often the most valuable and the least well-understood components of a business. The Relief from Royalty Method provides a structured, defensible, and market-grounded framework for assigning fair value to patents, trademarks, technology, and customer relationships.
Getting the valuation right has real consequences. It determines how a purchase price is allocated in an acquisition, how royalty rates are justified during a transfer pricing audit, and how IP is priced for FEMA compliance in a cross-border transaction. A poorly executed RFR analysis can be challenged by statutory auditors, the Income Tax Department, or a counterparty’s due diligence team.
My Valuation is one of India’s leading IBBI-registered valuation firms, offering expert intangible asset valuation for PPA, M&A, fundraising, and regulatory compliance. Our team is experienced in applying the Relief from Royalty Method under Ind AS 38, Ind AS 103, and Ind AS 113 across pharmaceutical, technology, FMCG, and financial services sectors.
Reach out to My Valuation for a certified intangible asset valuation report tailored to your transaction or compliance requirement.
Frequently Asked Questions
1. What is the Relief from Royalty Method in simple terms?
The Relief from Royalty Method values an intangible asset by calculating the present value of royalty payments the owner avoids by holding the asset rather than licensing it from someone else. If your company owns a trademark, you do not pay royalties to use it; that avoided cost, discounted over the asset’s useful life, is the asset’s value.
2. Which intangible assets can be valued using the Relief from Royalty Method?
The method is most commonly applied to patents, trademarks, brand names, proprietary technology, and software. It is the standard approach in Purchase Price Allocation exercises for M&A transactions in India. Customer relationships can also be valued using RFR, though the Multi-Period Excess Earnings Method is more widely used for that asset type.
3. Is the Relief from Royalty Method accepted under Indian accounting standards?
Yes. The method is accepted under Ind AS 38, Ind AS 113, and Ind AS 103. It is widely used in PPA exercises for Indian M&A transactions and is recognized by statutory auditors and tax authorities as a credible fair value measurement technique.
4. Who can conduct statutory intangible asset valuations under the Companies Act 2013?
Under Section 247 of the Companies Act 2013, statutory valuations must be conducted by an IBBI Registered Valuer. Non-registered professionals, including Chartered Accountants without IBBI registration, cannot sign statutory valuation certificates under the Act.
5. How is the royalty rate determined in the Relief from Royalty Method?
The royalty rate is determined through benchmarking against comparable licensing transactions between unrelated parties in the same sector and asset class. For cross-border IP transactions, the rate must also satisfy the arm’s length standard under Rule 10B of the Income Tax Rules 1962 to support the transfer pricing position.
6. Is the Relief from Royalty Method used for transfer pricing in India?
Yes. When an Indian entity pays royalties to a foreign related party for the use of IP, the rate must meet the arm’s length standard under Rule 10B. The benchmarking analysis that supports the royalty rate in an RFR valuation is directly relevant to defending the transfer pricing position in an audit.
7. How much does an intangible asset valuation cost in India?
The cost depends on the complexity of the asset, the number of assets to be valued, and the purpose of the valuation (PPA, transfer pricing, FEMA, or statutory). Contact My Valuation for a customized quote based on your specific asset and transaction requirements.
