Rental income is a crucial component of income for many taxpayers. However, there are instances where tenants fail to pay rent on time, leading to arrears or unrealised rent. To address such situations, Section 25A of the Income Tax Act provides specific provisions for taxing arrears of rent and unrealised rent when received subsequently. This blog will explain the tax treatment, deductions available, and implications of this provision in a simple and clear manner.
Understanding Section 25A of the Income Tax Act
Section 25A lays down the taxability of arrears of rent and unrealised rent when they are received in a subsequent financial year. Let’s break down the provision into key aspects:
1. Deemed Income from House Property
As per Section 25A(1), any arrears of rent received or unrealised rent realised subsequently shall be deemed as income from house property in the financial year in which it is received. This applies irrespective of whether the taxpayer is the owner of the property in that year or not.
2. Taxability in the Year of Receipt
The amount received is taxable only in the year it is received and not in the year it was due. This ensures that rental income that was previously unpaid but later recovered is taxed in the year of actual receipt.
3. Deduction of 30% Allowed
Under Section 25A(2), a deduction of 30% of the amount received (arrears or unrealised rent) is allowed. This deduction accounts for maintenance and repair costs, similar to the standard deduction under Section 24(a) for rental income.
Practical Example
Let’s understand this with an example:
Suppose Mr. Sharma owns a rental property and was supposed to receive ₹5,00,000 as rent in FY 2021-22.
The tenant failed to pay ₹1,00,000, which became unrealised rent.
In FY 2023-24, Mr. Sharma recovered this ₹1,00,000 from the tenant.
As per Section 25A, the amount of ₹1,00,000 will be taxed as income from house property in FY 2023-24.
He will be eligible for a 30% deduction, i.e., ₹30,000.
His taxable amount from the recovered rent will be ₹70,000 (₹1,00,000 – ₹30,000).
Key Points to Remember
Applicability: This provision applies to all taxpayers earning rental income.
Taxability Year: The income is taxed in the year of receipt, not the year it was due.
Deduction Allowed: A flat deduction of 30% is permitted, reducing the taxable portion.
Not Linked to Ownership: Even if the taxpayer no longer owns the property in the year of receipt, the amount is still taxable under Income from House Property.
Conclusion
Understanding the tax implications of arrears of rent and unrealised rent is crucial for property owners. Section 25A ensures that such income is taxed only when received, providing relief to taxpayers who face delays in rent payments. Additionally, the 30% deduction helps offset some tax burdens, making the provision more balanced.
For any queries related to taxation of rental income, consult a CA like us at +91 9769647582 to ensure proper compliance and tax planning.
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