Unrealised rent refers to rental income that is due but not received from a tenant. The Income Tax Act, 1961, provides specific rules for its treatment under Section 23(1) and Section 25A. Below is a structured explanation:
1. Conditions for Deducting Unrealised Rent
Unrealised rent can be excluded from taxable income only if:
- The tenancy is bona fide(genuine).
- The tenant has vacatedor steps have been taken to recover the rent (e.g., legal action).
- The rent is irrecoverable(reasonable efforts to recover have failed).
2. Calculation of Gross Annual Value (GAV) with Unrealised Rent
- Step 1:Compute Actual Rent Receivable (ARR) = Total rent expected – Unrealised rent.
- Step 2:Compare ARR with Expected Rent (higher of municipal value, fair rent, or standard rent).
- Step 3:GAV = Higher of:
- Expected Rent
- ARR(after deducting unrealised rent).
Example:
- Expected Rent = ₹3,00,000
- Actual Rent = ₹30,000/month (₹3,60,000/year)
- Unrealised Rent = ₹1,20,000
- ARR = ₹3,60,000 – ₹1,20,000 = ₹2,40,000
- GAV = Higher of ₹3,00,000 (Expected Rent) or ₹2,40,000 (ARR) = ₹3,00,0001.
3. Tax Implications
- If Unrealised Rent is Deducted:
- Lower GAV → Lower taxable income.
- Example:If GAV is reduced from ₹3,60,000 to ₹3,00,000 due to unrealised rent, taxable income decreases .
- If Unrealised Rent is Later Recovered:
- Taxable in the year of recoveryunder Section 25A.
- 30% standard deductionis allowed on the recovered amount .
4. Special Cases
- Full Unrealised Rent (₹3,60,000 in the example):
- ARR becomes zero, but GAV remains ₹3,00,000 (Expected Rent).
- Tax is still payablebecause the law taxes the property’s potential income, not just actual receipts .
- Vacancy + Unrealised Rent:
- If the property is vacant, GAV = Actual Rent Received(not Expected Rent) .
Summary
✅ Unrealised rent reduces Actual Rent Receivable (ARR) but not necessarily GAV.
✅ If recovered later, it is taxed under Section 25A with a 30% deduction.
✅ Follow ICAI’s method for exams but verify ITR forms for filing
