Section 25A recovery of unrealised rent and arrears rent

Recovery of unrealised rent and arrears rent section 25A provides that the amount of rent received in arrears or the amount of unrealised rent realised subsequent by an taxpayer shall be charged to income tax in the previous year in which such rent is received or realised, whether the taxpayer is the owner of the property or not in that previous year. 30% of the arrears of rent or the unrealised rent realised subsequently by the taxpayer, shall be allowed as deduction.

RECOVERY OF UNREALISED RENT AND ARREARS RENT SECTION 25A | DEDUCTION OF UNREALISED RENT AND ARREARS RENT SECTION 25A | SPECIAL PROVISION WHEN UNREALISED RENT IS REALISED SECTION 25A

APPLICABILITY

The taxpayer has received arrears of rent received from a tenant or the unrealised rent realised subsequently from a tenant.

TAX TREATMENT

The amount so received shall be taxable under the head ‘Income from house property’ in the year of receipt after deducting standard deduction @ 30% of such amount.

Arithmetically, taxable amount shall be - 

70% × [Recovery of Arrear Rent or Unrealised Rent]

TAXPOINT

• No other deduction shall be allowed from such income (unrealised rent and arrears rent) except standard deduction i.e. 30% of such receipt. (even legal expenditure or legal expenses shall not be allowed as deduction).

• The income is taxable on cash basis.

Note: Such receipt shall be chargeable as income under the head house property (house property income) although the taxpayer is not the owner of such property in the year of receipt.

EXAMPLE-

Mr. Lucky Ali owns a house property let out since 01/04/2016 to a school for monthly rent of ₹ 10,000. There was no change in rent till 31/03/2020. On 01/04/2020, as per court decision rent was increased to ₹ 12,000 per month with retrospective effect from 01/04/2018 and duly paid by school in the same year. Legal expenditure or legal expenses for such suit has been incurred by Mr. Ali ₹ 30,000. (Discuss tax treatment under the above section 25A).

SOLUTION-

Arrears rent belongs to the period 01/4/2018 to 31/03/2020 i.e., for 24 months. Arrears rent received = ₹ 2,000 × 24 months = ₹ 48,000

Such rent is taxable in the year of income or receipt as under:

Arrears of rent received ₹ 48,000

Less: Standard deduction under section 24(a) equal to 30% of such rent ₹ 14,400

Income from house property under section 25A ₹ 33,600.

Note: Legal expenditure is not deductible.