Tenant fails to pay rent: Can house owners exclude the unpaid amount from taxable income? Expert explains

For a house owner, rent that has accrued but has not actually been received from a defaulting tenant can create a tax concern. However, the Income-tax Act, 2025, provides relief where such rent qualifies as ‘unrealised rent’.

Section 21(4) of the Income Tax Act, 2025, specifically deals with rent that cannot be realised by the owner. It provides for cases where such rent will not be included when computing the actual rent received. Further, the detailed conditions for treating rent as ‘unrealised rent’ are elaborated in Rule 21 of the Income-Tax Rules, 2026.

This article explains the tax treatment of unrealised rent and the conditions that a taxpayer must meet to claim the benefit.

When can a house owner exclude unpaid rent?

As detailed in Section 20 of the Income Tax Act, 2025, income generated from property owned by the taxpayer is generally taxable under the head ‘Income from house property’.

Furthermore, Section 21 explains the determination of the property’s annual value. Sub-clause (4) of Section 21, i.e., Section 21(4), provides that rent that cannot be determined by the owner shall not be included when computing the actual rent received or receivable, subject to the prescribed rules.

To further facilitate proper tax compliance, Rule 21 of the Income Tax Rules, 2026, lays down the conditions for treating rent as unrealised. The tenancy must be bona fide, i.e., it should be legitimate, not fake or artificially created to claim a tax benefit.

Furthermore, the defaulting tenant must have vacated the property, or steps must have been taken to compel the tenant to vacate the property. The tenant should also not be in occupation of another property belonging to the owner.

Lastly, the owner must have taken appropriate legal steps to recover the unpaid rent, or should be in a position to satisfy the assessing officer (AO) that legal proceedings will be futile.

Example of unrealised rent

Suppose a landlord rents out a flat for ₹25,000 per month. If the tenant skips payment for four months, this amounts to ₹1 lakh in unrealised rent. Then, in such a case, the landlord can claim this ₹1 lakh as unrealised rent deduction while filing taxes, lowering taxable rental income, subject to the applicable rules and regulations.

Furthermore, if two years later the tenant clears the pending dues, the recovered amount becomes taxable in that financial year. This is the basic concept of unrealised rent.

Expert views

Mihir Tanna, Associate Director (Direct Tax), S K Patodia & Associates LLP (Chartered Accountants), touched upon this aspect in detail. “Unrealised rent from a tenant is eligible for deduction from the actual rent received or receivable, provided the following conditions are met:

• The defaulting tenant has vacated the property, or necessary steps have been taken to compel them to vacate.
• The defaulting tenant is not in occupation of any other property belonging to you.
• You have taken all reasonable legal steps to recover the unpaid rent.

He further added that “while unpaid rent can be excluded from your current taxable income if these conditions are satisfied, any amount recovered in the future will be taxable in the year of receipt, subject to a 30% standard deduction”.

What are the applicable legal provisions if the unpaid rent is recovered later?

In such cases, Section 23 of the Income-tax Act, 2025 provides that arrears or unrealised rent recovered subsequently are going to be treated as income from house property in the tax year in which it is received, even in case the taxpayer is no longer the owner of the property. A deduction equal to 30% of the recovered amount is permitted.

Hence, a landlord should maintain proper records and evidence of the tenant’s default and the legal steps taken for recovery. Simply not receiving rent will not automatically make it ‘unrealised rent’ for tax purposes.

Disclaimer: This article is for general information only and should not be treated as tax or legal advice. The tax treatment of unrealised rent depends on the applicable law and the facts of each case. Taxpayers should verify their eligibility and consult a qualified tax professional before taking any action.