Rent Not Received? Know the Income Tax Rules for Claiming Unrealised Rent:

Renting out a property can be a steady source of income for landlords. But when a tenant fails to pay rent, it can create both financial and tax headaches. A common question asked is whether a landlord in India has to pay income tax on rent due under the agreement but never actually received.

Under the income tax rules you can treat eligible unpaid rent as “unrealised rent” and deduct it while calculating taxable income from house property. But for landlords to enjoy this, they need to meet some conditions.

The first step is to choose the correct Income Tax Return (ITR) form. Eligible resident individuals with total income of up to Rs 50 lakh can generally file ITR-1 (Sahaj), which now allows income from up to two house properties, subject to other conditions.

Those who cannot use ITR-1 and do not have income from business or profession can generally file ITR-2. Taxpayers with business or professional income may need to use ITR-3. Eligible taxpayers opting for presumptive taxation may use ITR-4, subject to the applicable conditions.

For a rented-out property, the landlord has to report the gross rent received or receivable and separately mention the amount that qualifies as unrealised rent.

The property’s Annual Value is calculated on the basis of the eligible unrealized rent and the municipal taxes paid by the owner, if eligible. After working out the Net Annual Value (NAV), a usual allowance of 30% is available under Section 24(a). This deduction is allowed no matter how much was spent on repairs or maintenance.

24(b) allows landlords to claim eligible interest on borrowed capital, according to the rules and conditions applicable thereto.

Criteria for claiming unrealised rent

The Income Tax Rules, 1962, prescribe certain conditions that landlords must meet before claiming a deduction for unpaid rent.

The tenancy must be genuine, or bona fide. The tenant must have either vacated the property or the landlord must have taken steps to make the tenant vacate it.

The defaulting tenant should not be occupying another property belonging to the same landlord.

The landlord must also have taken reasonable steps to start legal proceedings for recovering the unpaid rent. Alternatively, the landlord must be able to satisfy the Assessing Officer that taking legal action would not be useful.

Landlords must keep documents supporting their claim such as rent agreement, rent records, communication with the tenant, legal notices, and proof of efforts made to recover the unpaid amount. These records can come in handy if the tax authorities question the deduction.

What if rent is recovered later?

Section 25A applies where the landlord recovers the previously unpaid rent in a subsequent financial year. The amount recovered is taxable in the year of receipt even if the landlord is not the owner of the property.

A flat 30% of the amount recovered is allowed as deduction before taxing the balance.