Question 3 OR (a)

Unrealised rent recovered later and arrears of rent (as set, 1961 Act, AY 2017-18)

5 marks

Time to write: About 10 minutes

From an older CBCS paper

Question

Question 3 OR (a) · 5 marks

What are the special provisions for unrealized rent when received, and for arrears of rent received that were not taxed earlier. 5

Paper note: The as-set version: set and answered under the Income-tax Act, 1961 for assessment year 2017-18 (previous year 2016-17), with the dates as printed. The English sentence ends with a full stop, not a question mark, as printed.

Reworded from the university paper; the task is the same. The original paper belongs to the University of Delhi. See DU's question bank.

Before you write

Read off the question and its marks

10 minfor 5 marks

Read from the question

What areThe meaning first, then the main points.

Write it in this order

Read; underline the asks; jot your points 1 min
1 Unrealised rent realised later 2 marks 3 min
2 Arrears of rent 1½ marks 2 min
3 Common rules and example 1½ marks 2 min
Check: every ask answered, key terms underlined 2 min

123

Short on time? Trim steps 1–3 evenly rather than skip one: each is capped at its own marks.

Try it first. About 10 minutes for 5 marks. Write it out, then open the solution.

Solution

Hover or tap a marked figure, like 72,000, to see how it is made and where else it appears.

The law in force for assessment year 2017-18

Both cases are governed by section 25A. The Finance Act, 2016 (Act 28 of 2016) put this single section in place of the older sections 25A, 25AA and 25B with effect from 1 April 2017, so it applies from assessment year 2017-18, the year of this paper (the footnote to section 25A in the consolidated text records the change).

Unrealised rent realised later

When annual value is worked out, rent the owner cannot realise is left out of the actual rent if the prescribed conditions are met (Explanation to section 23(1)). If that rent is recovered in a later year:

it is taxed as income from house property of the financial year in which it is realised (section 25A(1));
30% of the amount recovered is allowed as a deduction (section 25A(2)), so 70% is taxed;
nothing else, such as interest or municipal tax, is deducted from it.

Arrears of rent received

Arrears are rent of an earlier period that was not charged to tax then, for example after a rent increase agreed or decided with effect from a past date. When such arrears are received from a tenant:

they are taxed as income from house property of the financial year of receipt (section 25A(1));
30% of the arrears is allowed as a deduction (section 25A(2)).

Common rules

The amount is taxed whether or not the assessee owns the property in the year of receipt (section 25A(1)). An owner who has sold the house still pays tax on the rent recovered from the old tenant.
The 30% is a flat deduction in place of all actual expenses.
It is income of the year of receipt, so it is taxed at that year's rates, not reopened in the earlier year.

Example

Mr. Arun let a flat for ₹40,000 a month. In 2014-15 rent of ₹80,000 could not be realised, and it was left out of that year's actual rent. He sold the flat in 2015-16. In December 2016 he recovers ₹60,000 of it, and in the same year he receives ₹30,000 of arrears from a rent increase back-dated to 2014-15. For assessment year 2017-18 his income from house property from these receipts is (₹60,000 + ₹30,000) − 30% = ₹90,000 − ₹27,000 = ₹63,000, taxable although he no longer owns the flat.

Where the 5 marks sit

#	Component	Marks
1	Unrealised rent realised later	2
2	Arrears of rent	1.5
3	Common rules and example	1.5
	Total	5

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