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

Unpaid rent is not automatically excluded from taxable income. Know when a house owner can claim unrealised rent under the Income-tax Act, 2025, the conditions under Rule 21, and how subsequently recovered rent is taxed.

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.