Unrealised Rent on Property and How It’s Treated in Your Income: An Expert Guide

In the realm of real estate and property ownership, the concept of unrealised rent holds significant financial and legal implications for landlords and property owners. Unrealised rent, also known as accrued rent or rent receivable from deemed let-out property, represents rental income that property owners have earned but have not yet received from their tenants. It can arise for various reasons, such as tenant defaults or delayed payments. Understanding how unrealised rent works is crucial for both financial planning and taxation. 

What is unrealised rent?

Unrealised rent, also known as accrued rent or rent receivable, refers to rental income that a landlord has earned but has not yet collected. In other words, it represents the rent that is due to the landlord but remains unpaid by the tenant, applicable in both freehold and leasehold property scenarios. Unrealised rent occurs when the tenant has not paid the rent for a specific period, even though the time for which the rent is due has passed.

Landlords typically record unrealised rent as accounts receivable on their financial statements. This indicates the amount of money they are expecting to receive from tenants who have not yet paid their rent. However, if a landlord believes that they may not be able to collect the unpaid rent, they might need to consider it as a bad debt and write it off as a loss.

Landlords need to keep track of unrealised rent to maintain accurate financial records and to take appropriate actions to collect outstanding payments from tenants.

Is unrealised rent taxable?

Income generated from your property falls under the taxable category of ‘Income from house property’ as per Section 22 of the Income Tax Act. This section allows for deductions on taxable income within this category. However, the entire rental income is not subject to taxation; 70 percent of the income is considered taxable while the remaining 30 percent is deductible to cover maintenance costs.

In the realm of luxury apartments in Bangalore, specific tax provisions come into play regarding unpaid rent by tenants. When a tenant defaults on a payment, the corresponding portion is referred to as unrealized rent. This signifies the amount the property owner cannot collect as part of their actual rental income, and in some cases, this unpaid sum may even equal the total rental amount.

Importantly, property owners must fulfill certain criteria to establish unrealised rent, a significant consideration when exploring different types of real estate property for investment. They must provide evidence of their inability to recover the amount and demonstrate the genuine nature of the tenancy agreement. Landlords must prove that the tenant has either vacated the property or is in the process of being evicted. Tax authorities need to be convinced that all possible measures have been taken by the property owner to recover the outstanding amount.

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How does arrears of unrealised rent work?

The term “arrears of rent” pertains to rental income that the property owner did not receive in previous years and was not accounted for in income tax assessments. Regardless of whether the assessee was the owner during the year when the rent was due, this amount is considered the property owner’s income and is taxable under the category of ‘Income from House Property’. A deduction equivalent to 30 percent of the arrears of rent or the unrealized rent specified in sub-section (1) of the Income Tax Act will be permitted.

Here’s how arrears of unrealized rent work in India:

Legal Implications

If a tenant accumulates arrears of unrealized rent, the landlord can take legal action to recover the unpaid amount. The landlord may send notices to the tenant demanding payment. If the tenant still does not pay, the landlord can file a case in a rent court or tribunal to claim the arrears.

Tax Implications

Arrears of unrealized rent are typically treated as taxable income for the landlord in the year they become due, even if they are not received. The landlord needs to include this amount in their income tax return and pay taxes accordingly. However, in the subsequent year, if the arrears are recovered, it would be taxable in that year.

Documentation

Landlords must maintain proper documentation, including rental agreements, notices sent to the tenant, and any correspondence related to the unpaid rent and token money. These documents can be essential in legal proceedings to prove that the arrears are genuine and need to be paid.

Eviction

In certain cases, if the tenant consistently fails to pay rent and accumulates significant arrears, the landlord might have grounds for eviction. The specific eviction process varies from state to state in India and is governed by the Rent Control Act applicable in that area.

Tenant’s Responsibility

Tenants are legally obligated to pay rent on time as per the rental agreement. Failure to do so can lead to legal consequences, including eviction and legal action to recover the unpaid rent.

Both landlords and tenants need to be aware of their rights and responsibilities regarding rent payments and arrears to avoid legal disputes and ensure a smooth landlord-tenant relationship. Consulting with a legal professional can provide specific guidance based on individual situations and local laws.

Is there a condition for unrealised rent?

Yes, there are conditions associated with unrealized rent, particularly in the context of taxation in India. To claim a deduction for unrealized rent as allowed under the Income Tax Act, property owners must fulfill certain criteria. These conditions generally include:

Genuine Unrealization

The property owner must genuinely demonstrate that the rent amount was due and remains unrealized despite reasonable efforts to recover it.

Bona Fide Efforts

The property owner should provide evidence of making bona fide efforts to recover the unpaid rent. This might include serving legal notices to the tenant demanding payment, maintaining a record of correspondence, or any other appropriate means to recover the rent.

Proof of Vacancy or Eviction

Property owners must establish that the property was vacant during the period for which rent was due, or the tenant was in the process of being evicted. This can be proven through legal documents, notices, or any other relevant paperwork.

Documentation

Proper documentation, including rental agreements, receipts, notices sent to the tenant, records of attempts to recover unpaid rent, and the necessary No Objection Certificate (NOC), is essential to support the claim for unrealized rent deduction.

Tax Officer’s Satisfaction

The tax officer assessing the case should be satisfied with the evidence provided by the property owner regarding the unrealized rent and the efforts made to recover it.

Property owners need to maintain meticulous records and documentation related to rental agreements and unpaid rent to meet these conditions. Failure to meet these criteria could lead to the rejection of the deduction claim for unrealized rent. Consulting with a tax professional or legal advisor can provide specific guidance based on individual circumstances and the latest legal requirements.

If unrealised rent is recovered, what happens?

If unrealized rent is recovered, it is considered taxable income in the financial year in which it is received. Property owners are required to include the recovered amount in their income tax return and pay taxes on it according to the applicable tax slab. Essentially, once the unpaid rent is recovered, it is treated as regular rental income and is subject to taxation under the relevant provisions of the Income Tax Act.

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What is the formula for calculating unrealised rent?

Total rent amount (-) Actual rent received = Unrealised rent.

Is there an example of an unrealised rent?

When a tenant fails to pay their monthly rent of ₹20,000 to the landlord for several months where the tenant has lived a property for the last 8 months. The total paid rent accumulates to ₹60,000 over three months. During this time, the landlord has made genuine efforts to collect the rent, including sending notices to the tenant and attempting to communicate with them, but the rent remains unpaid.

In this scenario:

Total rent amount (-) Actual rent received = Unrealised rent.

1,60,000 (-) 60,000 = 1,00,000

– Monthly Rent: ₹20,000

– Unrealized Rent (for 5 months): ₹1,00,000

The ₹1,00,000 unpaid rent is considered unrealized rent because, although it is due to the landlord, it has not been received. The landlord can potentially claim deductions or take legal action to recover this unrealized rent, depending on the applicable laws and agreements in place.

Unrealized Rent: Legal Aspects and Financial Impact

Understanding the nuances of unrealised rent is paramount for property owners and landlords. Unrealised rent represents a critical aspect of property management, influencing both financial stability and legal obligations. By grasping the intricacies of this concept, property owners can make informed decisions, take appropriate legal actions, and effectively manage their rental income. To avoid the issue of irregular rent payments you can offer zero-rental flats to the tenets.

Navigating the complexities of unrealised rent not only empowers landlords to protect their financial interests but also ensures compliance with taxation laws. Being aware of the conditions, documentation requirements, and tax implications related to unrealised rent allows property owners to handle situations of non-payment or delayed payments with confidence and clarity.