A process for producing a permanent magnet alloy based on a R--Fe--B--C system wherein R is at least one of the rare earth elements including Y, comprising the steps of preparing a molten crude alloy, producing a powder directly therefrom or after casting it into an alloy ingot and then grinding it into the powder, compacting the thus obtained powder and sintering the compacted product, the ingot or powder of the alloy before being sent to the compacting step being subjected to a heat treatment which is carried out at a temperature of 500.degree.-1,100.degree. C. for a period of 0.5 hour or more so as to produce a permanent magnet alloy based on an a R--Fe--B--C system whose individual magnetic crystal grains are covered with an oxidation-resistant protective film which has a C content higher than that of the individual crystal grains.