Renting out real estate can provide a dependable income stream, but dealing with a tenant who fails to pay rent can create both financial and tax-related complications. A common concern for landlords in India is whether they have to pay income tax on rent that was contractually due but never actually received.However, qualifying unpaid rent can be treated as “unrealised rent” and deducted while calculating taxable income from house property, subject to the conditions prescribed under the Income Tax Rules.To claim this tax relief, landlords must first choose the appropriate Income Tax Return (ITR) form. Eligible resident individuals with total income of up to Rs 50 lakh can use ITR-1 (Sahaj), which now permits income from up to two house properties, subject to other eligibility conditions.Taxpayers who are not eligible to file ITR-1 and do not have income from business or profession can generally use ITR-2. Those with income from business or profession may need to file ITR-3, while eligible taxpayers whose business or professional income is covered by the presumptive taxation provisions may use ITR-4, subject to its conditions.For a let-out property, the taxpayer must report the gross rent received or receivable and separately disclose the amount of rent that qualifies as unrealised rent. The qualifying unrealised rent is taken into account while determining the property’s annual value, along with eligible municipal taxes paid by the owner.From the Net Annual Value (NAV), a standard 30% deduction is allowed under Section 24(a), irrespective of the actual expenditure incurred on repairs and maintenance. Eligible interest on borrowed capital may also be claimed under Section 24(b), subject to the applicable conditions.
Conditions for claiming unrealised rent
Before reducing taxable rent, landlords must satisfy the conditions laid down under Rule 4 of the Income Tax Rules, 1962. The rule requires:• The tenancy to be bona fide.• The defaulting tenant to have vacated the property, or steps to have been taken to compel the tenant to vacate.• The tenant must not be occupying any other property belonging to the same assessee.• The landlord must have taken all reasonable steps to institute legal proceedings for recovery of the unpaid rent, or be able to satisfy the Assessing Officer that legal proceedings would be useless.Landlords should retain supporting documents such as the lease deed, rent records, correspondence with the tenant, legal notices and evidence of recovery efforts in case the claim is questioned by the tax authorities.In case the landlord eventually recovers the unpaid rent in a later financial year, Section 25A applies. The amount recovered is treated as income from house property in the year in which it is received or realised, even if the taxpayer is no longer the owner of the property, with a flat 30% deduction allowed before the balance is taxed.
