Arrears of rent and unrealised rent received subsequently.
23(1)
The amount of arrears of rent received from a tenant or the unrealised rent realised subsequently from a tenant shall deemed to be the income from house property in respect of the tax year in which such rent is received or realised.
23(2)
The amount deemed to be income from house property under sub-section (1) shall be included in the total income of the assessee under the head “Income from house property”, whether the assessee is the owner of the property or not in that tax year.
23(3)
A sum equal to 30% of the arrears of rent or the unrealised rent referred to in sub-section (1) shall be allowed as deduction.
Section Summary:
This section deals with how arrears of rent (unpaid rent from previous years) and unrealised rent (rent that was not received earlier but is now collected) are treated for income tax purposes. It specifies that such amounts are considered as income from house property in the year they are received or realised, regardless of whether the taxpayer owns the property in that year or not. Additionally, a 30% deduction is allowed on these amounts to account for expenses.
Key Changes:
- Clarification on Tax Treatment: The section explicitly states that arrears of rent and unrealised rent are treated as income from house property in the year they are received, even if the taxpayer no longer owns the property.
- Introduction of 30% Deduction: A new provision allows a 30% deduction on such amounts, similar to the standard deduction allowed on regular rental income under Section 24(a) of the Income Tax Act.
Practical Implications:
- For Taxpayers: If you receive arrears of rent or unrealised rent in a particular year, it will be taxed as income from house property in that year, even if you no longer own the property. This could increase your taxable income for that year.
- For Businesses/Property Owners: Property owners must ensure proper documentation of arrears and unrealised rent to claim the 30% deduction. This deduction helps reduce the taxable amount.
- Compliance Burden: Taxpayers must report such income in their tax returns under the head "Income from house property" and ensure accurate calculation of the 30% deduction.
Critical Concepts:
- Arrears of Rent: Rent that was due in previous years but was not paid by the tenant and is received in the current year.
- Unrealised Rent: Rent that was not collected earlier (e.g., due to tenant default) but is now recovered.
- 30% Deduction: This is a standard deduction allowed to account for expenses like repairs, maintenance, and other costs associated with the property. It reduces the taxable amount of the arrears or unrealised rent.
Compliance Steps:
- Documentation: Maintain records of arrears of rent and unrealised rent received, including dates and amounts.
- Reporting: Include the received amount under "Income from house property" in your tax return for the year it is received.
- Claiming Deduction: Calculate and claim the 30% deduction on the total arrears or unrealised rent received.
Example:
Scenario: Mr. A owns a property and rented it out for ₹1,00,000 per year. In 2022, the tenant defaulted and did not pay rent for that year. In 2023, the tenant paid the unpaid rent of ₹1,00,000 (arrears) and an additional ₹50,000 for another default in 2021 (unrealised rent).
Application of Law:
- Mr. A receives ₹1,50,000 in 2023 (₹1,00,000 arrears + ₹50,000 unrealised rent).
- This ₹1,50,000 is treated as income from house property in 2023, even if Mr. A no longer owns the property.
- He can claim a 30% deduction: ₹1,50,000 × 30% = ₹45,000.
- Taxable income from this amount: ₹1,50,000 - ₹45,000 = ₹1,05,000.
This taxable amount will be added to Mr. A’s total income for 2023 under the head "Income from house property."