Recovery of Arrears of Rent and Unrealized Rent
by Under the Income tax Act, 2025, Section 23 contains the special provisions relating to arrears of rent and unrealised rent received or realised subsequently. These provisions ensure that rent which was not taxed earlier because it had not been received, or because it was genuinely unrealised, is brought to tax when it is subsequently received or realised. The amount is treated as income from house property in the tax year in which it is received or realised. Importantly, the assessee can claim a deduction of 30% of such arrears or unrealised rent, irrespective of the expenses actually incurred in collecting the amount.
1. Arrears of Rent
Arrears of rent means rent relating to an earlier period which was due from the tenant but was received by the assessee in a later tax year.
For example, rent of ₹2,00,000 relating to an earlier year becomes payable by the tenant but is received by the landlord in the current tax year. The ₹2,00,000 will be treated as income from house property in the year in which it is received.
The important point is that the amount is taxable in the year of receipt, even though it relates to an earlier period.
2. Unrealised Rent
Unrealised rent refers to rent which the owner was unable to recover from the tenant. Under the applicable rules, unrealised rent can be excluded while determining annual value if the prescribed conditions are satisfied. These conditions include a genuine tenancy, the tenant having vacated or steps being taken to make the tenant vacate, the tenant not occupying another property of the assessee, and reasonable steps having been taken for recovery of the unpaid rent or the Assessing Officer being satisfied that legal proceedings would be useless.
If such unrealised rent is subsequently recovered, Section 23 treats the recovered amount as income from house property in the tax year in which it is realised.
3. 30% Deduction
Section 23 specifically provides a deduction equal to 30% of the arrears of rent or unrealised rent subsequently realised. This deduction is allowed while computing the taxable amount under the head Income from House Property.
Formula:
Taxable Arrears / Unrealised Rent = Amount Received − 30% Deduction
Thus, effectively 70% of the amount received or realised becomes taxable.
Example
Suppose Mr. A receives arrears of rent of ₹1,00,000 during the current tax year.
| Particulars | Amount |
|---|---|
| Arrears of rent received | ₹1,00,000 |
| Less: 30% deduction | ₹30,000 |
| Taxable amount | ₹70,000 |
The ₹70,000 is included under the head Income from House Property in the year of receipt.
4. Taxability Even if Not Owner in Year of Receipt
A significant feature of Section 23 is that the arrears or subsequently realised unrealised rent is included as income from house property even if the assessee is not the owner of the property in the tax year in which the amount is received or realised.
Therefore, the tax treatment follows the nature of the amount as arrears or previously unrealised rent rather than depending upon ownership in the year of actual receipt.