Unrealised Rent

Unrealised rent refers to the portion of rent that a landlord is entitled to receive but has not collected due to the tenant’s failure to pay. Under Indian tax laws, landlords can claim a deduction for unrealised rent, provided certain conditions are met. This deduction helps reduce taxable rental income.

To claim unrealised rent deduction, the property must be let out, and legal steps should have been taken to recover dues. The amount of unrealised rent is excluded from the total rental income while calculating tax liabilities. However, if the landlord later recovers the amount, it becomes taxable in the year of recovery.

Understanding unrealised rent is essential for landlords to optimise their tax planning. It also highlights the importance of proper tenant screening and legal safeguards while leasing out a property.

Example of unrealised rent

Let’s consider an example to understand how unrealised rent works.

Suppose a landlord rents out a flat for Rs. 20,000 per month. The tenant defaults on rent payments for four months, amounting to Rs. 80,000. The landlord initiates legal action but has not yet recovered the rent. In this case, the landlord can claim Rs. 80,000 as unrealised rent while filing income tax returns, reducing the taxable rental income for that year.

Now, assume that after two years, the tenant clears the outstanding amount. In that case, the recovered Rs. 80,000 will be added to the landlord’s taxable income in the year of receipt, as per income tax provisions.

This example illustrates how unrealised rent is treated in taxation and why landlords must track rental payments closely.

What is arrears of unrealised rent

Arrears of unrealised rent refer to the rent that was previously not received but is recovered in a later financial year. This amount is taxable in the year of recovery, even if the landlord did not own the property at that time.

For instance, if a tenant failed to pay Rs. 50,000 in rent during 2022-23, and the landlord recovers it in 2024-25, the amount will be taxable in 2024-25. The taxation of arrears of unrealised rent is governed by Section 25A of the Income Tax Act.

It is important to note that while arrears of rent are taxable, landlords can claim a standard deduction of 30% on the recovered amount to account for expenses related to the property. This helps reduce the overall tax liability.

Proper documentation and legal records are crucial for landlords to claim unrealised rent deductions and manage tax implications efficiently.

Conditions of unrealised rent

For a landlord to claim unrealised rent deduction under the Income Tax Act, the following conditions must be met:

1. Tenant has defaulted – The tenant must have defaulted on the rent, leading to non-payment for a specific period.
2. Legal action has been taken – The landlord must have made genuine attempts to recover the unpaid rent through legal means or written communication.
3. Property is let out – The deduction is applicable only if the property was rented out during the relevant financial year.
4. Rent is irrecoverable – The landlord must provide proof that the rent is unlikely to be recovered despite efforts.

Meeting these conditions ensures that landlords can exclude unrealised rent from their taxable rental income, thereby reducing their tax burden.

How to calculate unrealised rent

Calculating unrealised rent is straightforward. The formula is:

Unrealised rent = (Monthly rent) × (Number of months rent is unpaid)

For example, if the monthly rent is Rs. 25,000 and the tenant has not paid rent for three months, the unrealised rent will be:

Rs. 25,000 × 3 = Rs. 75,000

This Rs. 75,000 can be deducted from the gross annual rental income while filing taxes, provided all conditions are met. If the amount is later recovered, it must be added to taxable income in that financial year.

Conclusion

Unrealised rent is an important concept for landlords to understand, as it directly affects rental income and tax liabilities. The Income Tax Act provides relief by allowing deductions for unrealised rent, provided specific conditions are met.

Landlords should maintain proper records of rent payments, lease agreements, and legal communications to claim deductions effectively. If the unrealised rent is recovered later, it must be reported as income in the year of receipt.

By understanding and managing unrealised rent efficiently, landlords can optimise their tax liabilities and ensure better financial planning.

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