A harmonic drive is a compact, lightweight, and high-ratio torque transmission device which is used in many electrically actuated robot manipulators. In this paper a built-in torque sensor for harmonic-drive systems is examined in detail. The method proposed by Hashimoto, in which strain gauges are directly mounted on the flexspline, is employed and improved in this paper. To minimize sensing inaccuracy, four Rosette strain gauges are used employing an accurate positioning method. To cancel the torque ripples, the oscillation observed on the measured torque and caused mainly by gear teeth meshing, Kalman filter estimation is used. A simple fourth-order harmonic oscillator proved to accurately model the torque ripples. Moreover, the error model is extended to incorporate any misalignment torque. By on-line implementation of the Kalman filter, it has been shown that this method is a fast and accurate way to filter torque ripples and misalignment torque. Hence, the intelligent built-in torque sensor is a viable and economical way to measure the harmonic-drive transmitted torque and to employ that for torque feedback strategies.