What Is the Difference Between Franchise Fees and Royalties?
Quick Summary
Franchise fee: a one-time upfront payment to enter the brand
Royalty: a recurring monthly or quarterly payment to keep operating
The royalty base (what the percentage is applied to) matters more than the rate itself
Both attract 18% GST in India under SAC Code 998396
Royalties also require TDS deduction under Section 194J at 10%
Most agreements carry a third cost: a marketing contribution, separate from royalty
India has no dedicated franchise law, so the written agreement is your only protection
Two people signed supermarket franchise agreements in the same month. One spent a week on the document and made the brand define the royalty base in writing. The other trusted the headline numbers and signed in two evenings. Three months in, the second person found his royalty was calculated on his purchase value from the franchisor's supply chain, not on his store's sales. His monthly royalty bill was 40% higher than he had budgeted.
Both paid the same headline rate. One understood what it was applied to.
That is the difference this post is built around.
What Is A Franchise Fee?
A franchise fee is a one-time, upfront payment that gives you the right to open and operate under the brand.
What It Typically Covers
Think of it as an entry ticket. You pay it once, and you get:
The right to use the brand's trademark, logo, and name
Initial training for you and your team
Store layout guidelines and design support
Pre-launch and setup assistance
Territory rights, if the agreement grants them
Once paid, the franchise fee does not repeat. It is your cost to enter, not your cost to stay.
What A Fair Fee Looks Like In India
In Indian grocery store franchise models, franchise fees typically range from Rs 1 lakh to Rs 10 lakh. The exact number depends on the brand's size, your city, and your store format.
A fair franchise fee is:
Stated as a fixed rupee amount, not a vague range
Separated clearly from security deposits or equipment costs
Non-refundable, with conditions stated if the deal falls through before setup
Followed by an 18% GST invoice from the franchisor on top of the quoted amount
If a brand tells you the fee verbally but will not write a number into the agreement, treat that as a red flag. Believe the document.
What Is A Royalty Fee?
A royalty is a recurring payment for the right to keep operating under the brand. You have already paid to enter. Royalty is what you pay to stay in.
Most first-time franchisees focus on the percentage. That is the wrong focus. The royalty base is what actually determines how much you pay.
Understanding The Royalty Base
The royalty base is the figure the percentage is calculated on. In India, it can be:
Gross sales: Total store billing. The most common and transparent base.
Net sales: Gross sales minus returns. Similar to gross in most grocery setups.
Purchase value: What you buy from the franchisor's supply chain. Very different from sales-based royalty, and often higher because purchases happen before you sell anything.
Gross margin: A cut of your profit. Rare, but it exists.
Here is a plain rupee example. Your store does Rs 5 lakh in monthly sales with a 20% margin, meaning your monthly stock purchase is around Rs 4 lakh.
At 3% on gross sales: Rs 15,000 per month.
At 3% on purchase value in a normal month: Rs 12,000. But in a month where you stocked up to Rs 6 lakh in inventory: Rs 18,000.
The base, not the rate, is where the real franchise fee and royalty difference plays out.
Minimum Royalty Clauses To Watch For
Some agreements carry a minimum royalty, a fixed amount you pay even when sales are zero. In a slow month or a festival gap, this clause hurts. Identify whether your agreement has one, and calculate what it costs over a full bad quarter.
Typical royalty rates in supermarket franchise in India models run from 0% to 8% of the applicable base. Anything above 5% to 6% on gross sales deserves a harder look at what ongoing support you are actually receiving.
Franchise Fee vs Royalty: Side-By-Side
Here is how the franchise fees vs royalties comparison plays out when you put them next to each other.
Factor | Franchise Fee | Royalty |
When paid | Once, before opening | Monthly or quarterly, ongoing |
What it covers | Brand entry, training, territory, setup | Continued brand use, systems, ongoing support |
How calculated | Fixed rupee amount | Percentage of a defined base |
Can it change? | No, locked at signing | Sometimes, if the agreement allows rate revision |
GST | 18% on amount paid | 18% on each payment made |
TDS | Usually not applicable | Section 194J: franchisee deducts 10% before paying |
Negotiability | Rarely | Sometimes: graduated rate, first-year waiver, threshold |
The Third Fee Most Articles Skip
When people study what is the difference between franchise fee and royalty fee, they focus on two costs. In most agreements, there is a third one.
Marketing or advertising contributions are separate recurring payments, typically 1% to 3% of monthly sales, that go into a central fund managed by the franchisor. You do not control how it is spent.
Before signing, check:
Is the marketing rate fixed in the agreement or can it be revised?
Who decides where the money goes, and do you get a summary?
Is it charged on the same base as royalty, or a different one?
A fair clause locks the rate, states the base, and gives you annual transparency on how the fund was spent.
India-Specific Rules You Must Know
India has no dedicated franchise law. The Indian Contract Act, 1872 governs everything in your agreement, including fees, royalties, territory, and exit. No rule forces an Indian franchisor to give you a pre-signing disclosure document the way US law does.
What is not written does not exist. Have a local lawyer read the agreement before you sign. This article is general guidance, not legal advice.
GST On Franchise Fees And Royalties
Both fees attract 18% GST in India under SAC Code 998396, classified as Trademarks and Franchises. This was confirmed in a 2020 Gujarat Authority for Advance Ruling order. Budget 18% on top of every fee the franchisor bills you.
If the franchisor is in a different state from your store, the invoice should reflect IGST. If both are in the same state, it will be CGST plus SGST. Consult your chartered accountant on whether input tax credit applies to your setup.
TDS Under Section 194J
When you pay royalties to an Indian franchisor, Section 194J of the Income Tax Act requires you to deduct TDS at 10% before transferring the amount. You pay the franchisor 90%. The 10% goes to the government as advance tax. Missing this creates a tax liability for you, not for the franchisor.
Stamp Duty And Agreement Registration
The agreement must be stamped. Minimum stamp duty is Rs 500, but it is usually calculated on the total franchise fee, royalty amounts, and agreement term under state stamp acts. Maharashtra applies the strictest rules. An under-stamped agreement can be held inadmissible as evidence in a dispute. Registration is not mandatory but strengthens your legal position.
Pre-Sign Fee Checklist
Score any agreement before you commit. One point for each yes.
Franchise fee stated as a fixed rupee amount in the agreement
Royalty base explicitly defined (gross sales, net sales, purchases, or margin)
Minimum royalty clause identified and calculated for a zero-sales month
Marketing contribution stated separately from royalty, with a locked rate
18% GST treatment confirmed for each fee type
TDS obligations under Section 194J clarified with your CA
Agreement stamped per your state's stamp duty rules
Total royalty outflow calculated over the full agreement term
All verbal promises added in writing before signing
A local lawyer has reviewed the full document
9 to 10: Sign with confidence. 6 to 8: Negotiate the gaps first. Below 6: Walk away, regardless of what the pitch deck says.
For the full clause-by-clause walkthrough beyond just fees, read what to check in a franchise agreement before you sign.
How 7x Basket Structures Its Fees
We put every cost in writing before you make any decision.
The franchise fee is a fixed rupee amount based on your store size. It covers brand licence, store design support, training, and pre-launch preparation. It does not overlap with your security deposit or setup costs, which are listed separately.
Royalty is zero for your first two years. From year three, it is 1% of monthly sales, charged on gross sales, not purchase value. Marketing contribution is disclosed separately at a fixed rate and does not change without your written consent.
Use the investment calculator to estimate total costs by store size before committing. When you are ready to see the full written fee schedule for your city, apply for a franchise and our team will walk you through every number.
If you want to understand how ownership and fee structures differ across models, the FOFO vs FOCO vs COCO guide covers that in detail. And if you are starting from scratch, how a supermarket franchise works in India is the right first read.
