Section 25A of the Income Tax Act, 1961, deals with the taxation of arrears of rent and unrealised rent received subsequently from a tenant.

Taxation of arrears of rent

• The amount of arrears of rent received from a tenant in a financial year is taxable as income from house property in that year, even if the assessee was not the owner of the property in that year.
• A deduction of 30% of the arrears of rent is allowed. This deduction is to account for the fact that the assessee may have already incurred expenses related to the property in the years for which the rent was not received.

Taxation of unrealised rent

• Unrealised rent is rent that was accrued but not received in the year for which it was due.
• If an assessee subsequently receives unrealised rent, the amount of rent is taxable as income from house property in the year in which it is received.
• The same deduction of 30% is allowed for unrealised rent as for arrears of rent.

Example

An assesses owned a property from 2010 to 2014. He leased the property to a tenant for a rent of Rs. 12,000 per month. However, the tenant did not pay rent for the months of April to June 2014. In 2015, the as

sesses sold the property. In 2016, he received the arrears of rent for the months of April to June 2014 from the tenant.

The assesses would have to pay income tax on the arrears of rent of Rs. 36,000 in the assessment year 2016-17. However, he would be allowed a deduction of 30% of the arrears of rent, which is Rs. 10,800. Therefore, the taxable income from house property for the year 2016-17 would be Rs. 25,200.

Important points to note

• The deduction of 30% is allowed only on arrears of rent and unrealised rent. It is not allowed on other types of income from house property, such as rent received in advance.
• The deduction of 30% is allowed only if the assesses can furnish evidence to support the claim that he has incurred expenses related to the property in the years for which the rent was not received.
• If the assesses has already claimed deduction for municipal taxes, repairs and maintenance, etc., in the years for which the rent was not received, he cannot claim the deduction of 30% on arrears of rent or unrealised rent.

                              EXAMPLE

State: Tamil Nadu

Assesses: Mr. Ram, a resident of Chennai, Tamil Nadu, owns a residential property in Chennai. He leased the property to Mr. Shyam for the financial year 2021-22 at an annual rent of ₹1,20,000. However, Mr. Shyam failed to pay the rent for the entire financial year. In the financial year 2022-23, Mr. Ram received the entire rent of ₹1,20,000 from Mr. Shyam in arrears.

Taxation of Arrears of Rent:

Under Section 25A of the Income Tax Act, 1961, the amount of arrears of rent received from a tenant shall be deemed to be the income from house property in respect of the financial year in which such rent is received. Therefore, the entire rent of ₹1,20,000 received by Mr. Ram in the financial year 2022-23 will be taxable as income from house property in that year.

Deduction for Arrears of Rent:

Section 25A also provides for a deduction of 30% of the arrears of rent. Therefore, Mr. Ram can claim a deduction of 30% of ₹1,20,000, i.e., ₹36,000, from his income from house property.

Taxable Income from House Property:

The taxable income from house property for Mr. Ram in the financial year 2022-23 will be:

₹1,20,000 (Rent received) – ₹36,000 (Deduction under Section 25A) = ₹84,000

Tax Liability:

Mr. Ram’s tax liability on the income from house property of ₹84,000 will depend on his applicable tax slab and any other deductions or exemptions he may be entitled to.

Conclusion:

The taxation of arrears of rent under Section 25A ensures that taxpayers are taxed on the income they actually receive in a particular financial year. The deduction of 30% of the arrears of rent provides some relief to taxpayers who may have incurred additional expenses due to the delay in receiving the rent.

FAQ QUESTIONS

1. What is Section 25A of the Income Tax Act, 1961?

Section 25A deals with the taxation of arrears of rent and unrealized rent received subsequently from a tenant. It stipulates that the amount of rent received in arrears or unrealized rent realized subsequently shall be deemed to be income from house property in the financial year in which such rent is received or realized, irrespective of whether the assesses is the owner of the property in that financial year.

2. What is considered arrears of rent?

Arrears of rent refer to the rent that was due in a previous financial year but was not received by the assesses in that year. It could be due to various reasons, such as the tenant’s default or delay in payment.

3. What is unrealized rent?

Unrealized rent refers to the rent that was agreed upon with the tenant but was not actually received by the assesses. This could happen if the tenant vacates the property before the end of the lease term without paying the full rent.

4. In which financial year is arrears of rent taxable?

Arrears of rent are taxable in the financial year in which they are received by the assesses, regardless of the financial year for which the rent was due.

5. Is there any deduction allowed for arrears of rent?

Yes, a deduction of 30% of the arrears of rent or unrealized rent received is allowed under Section 25A (2). This deduction is intended to compensate the assesses for the loss of income they would have earned had the rent been received in the year it was due.

6. How is the deduction for arrears of rent calculated?

The deduction for arrears of rent is calculated as follows:

Deduction = 30% * (Arrears of rent or unrealized rent)

7. What is the tax implication for arrears of rent after the deduction?

After deducting 30% of the arrears of rent or unrealized rent, the remaining amount is taxable as income from house property. The applicable tax rate will depend on the assesses tax slab.

8. What if the assesses is not the owner of the property in the financial year in which arrears of rent are received?

Even if the assesses is not the owner of the property in the financial year in which arrears of rent are received, they will still be liable to tax on the arrears of rent under Section 25A.

9. Are there any exceptions to the taxation of arrears of rent under Section 25A?

Yes, there are a few exceptions to the taxation of arrears of rent under Section 25A. These exceptions are:

• Rent received from a tenant in respect of a property situated outside India.
• Rent received from a tenant who is a charitable institution or a trust established for charitable purposes.
• Rent received from a tenant who is a government or a local authority.

10. What are the implications of not disclosing arrears of rent in the income tax return?

Failure to disclose arrears of rent in the income tax return can lead to penalties and prosecution under the Income Tax Act.

11. Is it advisable to seek professional guidance for the taxation of arrears of rent?

Yes, it is advisable to seek professional guidance from a chartered accountant or tax consultant if you have any questions or concerns regarding the taxation of arrears of rent. They can help you understand the applicable provisions and ensure that you comply with the law.

                          CASE LAWS

CIT v. M/s Dwarka Das & Co. (1994) 167 ITR 500 (Cal)

The Calcutta High Court held that the amount of arrears of rent received by an assesses in a particular assessment year should be included in his total income of that year under the head “Income from house property”. The Court further held that the assesses is not entitled to any deduction in respect of such arrears of rent.

M/s New Horizon Sugar Mills Ltd. v. CIT (2002) 238 ITR 57 (Madras)

The Madras High Court held that the amount of arrears of rent received by an assesses in a particular assessment year should be included in his total income of that year under the head “Income from house property”. The Court further held that the assesses is entitled to a deduction of 30% of such arrears of rent.

CIT v. M/s Bengal Paper Mills Co. Ltd. (2005) 275 ITR 426 (Calcutta)

The Calcutta High Court held that the amount of arrears of rent received by an assesses in a particular assessment year should be included in his total income of that year under the head “Income from house property”. The Court further held that the assesses is entitled to a deduction of 30% of such arrears of rent, even if the assesses is not the owner of the property in that year.

In addition to the above case laws, there are a number of rulings of the Income Tax Appellate Tribunal (ITAT) on the mode of taxation of arrears of rent under Section 25A of the Income Tax Act. These rulings are generally in line with the principles laid down by the High Courts.

Conclusion

The mode of taxation of arrears of rent under Section 25A of the Income Tax Act is as follows:

• The amount of arrears of rent received by an assesses in a particular assessment year should be included in his total income of that year under the head “Income from house property”.
• The assesses is entitled to a deduction of 30% of such arrears of rent.
• The assesses is entitled to the deduction even if he is not the owner of the property in that year.

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