Income Tax Rules, 1962 | House Property
Rule 4: Unrealised Rent and Income from House Property
Rule 4 sets out when unpaid rent can be treated as unrealised rent while determining the annual value of a let-out property under section 23(1) of the Income-tax Act, 1961.
What is unrealised rent?
Unrealised rent is rent payable by a tenant that the property owner has not received and has proved to be lost and irrecoverable. For the purposes of the Explanation below section 23(1), the amount may be excluded from the rent used to determine annual value when the prescribed conditions are met. A mere delay in payment does not, by itself, establish that rent is irrecoverable.
Four conditions under Rule 4
The original Rule 4 specifies the following requirements for rent payable but not paid by a tenant to be treated as lost and irrecoverable:
- Bona fide tenancy: The tenancy must be genuine.
- Vacating the property: The defaulting tenant must have vacated the property, or steps must have been taken to compel the tenant to vacate.
- No other property occupied: The defaulting tenant must not occupy any other property belonging to the same assessee.
- Recovery efforts: The owner must have taken all reasonable steps to institute legal proceedings to recover the unpaid rent, or must satisfy the Assessing Officer that such proceedings would be useless.
All four conditions matter when establishing the amount of unrealised rent under this rule.
How unrealised rent affects annual value
Under the section 23 framework, actual rent received or receivable is considered when determining the gross annual value of a let-out house property. Qualifying unrealised rent is excluded from the relevant rent figure, subject to the statutory calculation and any applicable vacancy provisions.
| Illustration | Amount |
|---|---|
| Rent payable for the year | Rs. 3,60,000 |
| Rent established as unrealised under Rule 4 | Rs. 60,000 |
| Rent after excluding qualifying unrealised rent | Rs. 3,00,000 |
This example only illustrates the adjustment to rent; it is not a complete annual-value or taxable-income calculation. Expected rent, vacancy, municipal taxes and statutory deductions must be considered separately where relevant.
Documents to support a claim
Keep the tenancy agreement, rent ledger, bank statements, correspondence and notices demanding payment, evidence that the tenant vacated or eviction steps were taken, and legal advice or recovery records. These can help demonstrate that the unpaid rent is genuinely irrecoverable and that the Rule 4 conditions are satisfied.
What happens if unrealised rent is recovered later?
Under section 25A of the Income-tax Act, 1961, arrears of rent or unrealised rent subsequently received are generally taxable under the head Income from house property in the year of receipt, even if the recipient is no longer the owner of the property. A deduction of 30% of such receipts is provided under that section, subject to the law applicable for the relevant year.
Frequently asked questions
Can unpaid rent automatically be deducted?
No. The owner must establish that the amount is lost and irrecoverable and satisfy the conditions prescribed by Rule 4.
Must the tenant have vacated the premises?
Rule 4 permits either actual vacation of the property or steps taken to compel the defaulting tenant to vacate.
Is filing a recovery suit always necessary?
The rule requires reasonable steps to institute legal proceedings, unless the Assessing Officer is satisfied that legal proceedings would be useless.
Is recovered rent tax-free if it was previously excluded?
No. Subsequent recovery can trigger tax in the year of receipt under the applicable provisions governing arrears and unrealised rent.
Relevant provisions
Read Rule 4 with section 23(1) and section 25A of the Income-tax Act, 1961 for the relevant assessment year. For a related discussion of employee benefits, see Rule 3 on valuation of perquisites. Verify the legislation and subordinate rules applicable to the tax year being filed.