Unrealised rent realised later, under section 25A (as set, 1961 Act, AY 2018-19)

Unrealised rent in the year it falls due

When the annual value of a let-out property is worked out under section 23(1)(b) or (c), rent that the owner cannot realise is left out of the actual rent, subject to the rules made for it (Explanation to section 23(1)). That does not always keep it out of the annual value. Under section 23(1)(b) the actual rent is taken only where it is more than the sum for which the property might reasonably be expected to let (section 23(1)(a)); otherwise that expected sum is the annual value. So the unrealised rent escapes tax in the year it falls due only to the extent that leaving it out lowers the annual value: where the actual rent net of it is still above the expected sum, the whole of it escapes; where it falls below, the expected sum is taxed in any case (and under section 23(1)(c) the lower actual rent is taken only where it is lower owing to vacancy).

The provision for a later realisation

Section 25A, as substituted with effect from 1 April 2017 (its footnote; it applies to assessment year 2018-19), deals with the rent when it is recovered later:

1. The unrealised rent realised subsequently from a tenant is deemed to be income from house property of the financial year in which it is realised, and is taxed under that head in that year (section 25A(1)).
2. It is taxed even if the assessee no longer owns the property in that year (section 25A(1)).
3. A deduction of 30% of the amount realised is allowed (section 25A(2)); no other deduction (such as interest or municipal tax) is allowed against it.

The same rule applies to arrears of rent received from a tenant.

Points to note

• The amount is taxed in the year of realisation, not reopened in the year it fell due.
• It is taxed separately from the annual value of the current year, so it is added even where the property is now self-occupied, sold or vacant.
• The earlier provisions on these matters, which had different conditions, were replaced by the present section 25A from 1 April 2017.

Illustration (our own figures)

Rent of ₹60,000 that a tenant failed to pay for 2015-16 was left out of that year's annual value. The owner sold the house in 2016 and recovered ₹60,000 from the old tenant in January 2018. For assessment year 2018-19 he is taxed on ₹60,000 − 30% = ₹42,000 under the head Income from house property, though he no longer owns the house.