Special Provisions for Arrears of Rent and Unrealised Rent (Section 25A)

Section 25A of the Income Tax Act, 1961, governs the tax treatment of arrears of rent (unpaid rent recovered later) and unrealised rent (rent previously written off but later received). This provision ensures that such amounts are taxed fairly while providing relief to landlords.

Key Provisions of Section 25A

1. Taxability in the Year of Receipt

• Arrears of rent or unrealised rent received in a financial year are deemed as “Income from House Property”for that year, even if the assessee no longer owns the property.
• Example:If rent due in FY 2021-22 is recovered in FY 2024-25, it is taxed in FY 2024-25, not 2021-22.

2. 30% Standard Deduction

• A flat 30% deductionis allowed on the arrears/unrealised rent to account for expenses (e.g., maintenance, legal costs).
• Taxable Amount= (Arrears/Unrealised Rent) – 30% Deduction.

3. Conditions for Unrealised Rent Deduction

To exclude unrealised rent from taxable income initially (before recovery), the landlord must:

• Prove the tenant defaulted and took legal steps(e.g., court case, written demands) for recovery.
• Show the property was let outand the rent was irrecoverable 4.

Practical Examples

Scenario 1: Arrears of Rent

• Facts: Sharma recovers ₹1,00,000 in FY 2024-25 for rent unpaid in FY 2021-22.
• Taxable Income:
  • ₹1,00,000 – 30% (₹30,000) = ₹70,000(added to FY 2024-25 income).

Scenario 2: Unrealised Rent

• Facts:A landlord writes off ₹50,000 as unrealised rent in FY 2022-23 but recovers it in FY 2024-25.
• Taxable Income:
  • ₹50,000 – 30% (₹15,000) = ₹35,000(taxable in FY 2024-25).

Key Exceptions & Notes

1. No Ownership Requirement:Tax applies even if the property was sold before recovery.
2. No Double Taxation:Rent is taxed only once—when received, not when due.
3. Documentation:Maintain records of lease agreements, legal notices, and recovery attempts.

Comparison with Regular Rental Income