Arrears of Rent and Unrealised Rent Received Later: Tax Treatment under the Income Tax Act 2025

Under section 23 of the Income Tax Act 2025, rent that reaches you late is taxed in the year you actually receive it, under the head "Income from house property". This covers arrears of rent (rent due for earlier periods, for example after a rent revision) and unrealised rent (rent you could not collect earlier and later recovered). You get a flat 30% deduction on the amount, and the tax applies even if you no longer own the property.

This guide explains each term, shows the calculation with figures for tax year 2026-27, and lists the mistakes that come up most often. The law quoted is the Income Tax Act 2025 as amended by the Finance Act 2026. Last reviewed against that text on 10 November 2026.

What does section 23 of the Income Tax Act 2025 say?

Section 23 has three parts:

• Section 23(1): arrears of rent received from a tenant, or unrealised rent realised later from a tenant, is deemed to be income from house property for the tax year in which it is received or realised.
• Section 23(2): that amount goes into your total income under "Income from house property", whether or not you own the property in that tax year.
• Section 23(3): a deduction equal to 30% of the arrears or unrealised rent is allowed.

What is the difference between arrears of rent and unrealised rent?

	Arrears of rent	Unrealised rent
Meaning	Rent due for an earlier period that the tenant pays now. A common cause is a back-dated rent increase or a delayed settlement.	Rent that the owner could not collect when it was due, and which is recovered from the tenant later.
Earlier treatment	Not received in the earlier year.	Excluded from actual rent in the earlier year, because section 21(4) says rent which cannot be realised is left out of the actual rent received or receivable, subject to rule 21 of the Income-tax Rules, 2026.
Taxed in	The tax year it is received (section 23(1))	The tax year it is realised (section 23(1))
Deduction	30% (section 23(3))	30% (section 23(3))

Rule 21 of the Income-tax Rules, 2026 says rent counts as unrealised only if it was receivable but not paid, and is proved to be lost and irrecoverable, where all of these hold:

• the tenancy is bona fide;
• the defaulting tenant has vacated, or steps have been taken to compel him to vacate;
• the defaulting tenant is not in occupation of any other property of the owner; and
• the owner has taken all reasonable steps to institute legal proceedings for recovery, or satisfies the Assessing Officer that such proceedings would be futile.

In which year is arrears or unrealised rent taxed?

In the year you receive it, not the year it was originally due. Even if the arrears relate to 2023-24, they are income of the year you collect them. The diagram shows the idea.

How is tax on arrears of rent calculated? Worked example 1

Assumptions: Ravi let a shop to a tenant. In tax year 2026-27 the court settles a dispute and the tenant pays Rs 1,20,000 as arrears for the earlier period, in one payment. Nothing else is received for those months.

Step	Working	Rs
1. Arrears received in 2026-27		1,20,000
2. Less: 30% deduction, s 23(3)	30% x 1,20,000	36,000
3. Added to income from house property	1,20,000 - 36,000	84,000

The Rs 84,000 is added to Ravi's income from house property for 2026-27. It is taxed at his slab or applicable rate for that year, not the year the rent was due.

How is unrealised rent taxed when recovered? Worked example 2

Assumptions: Meena let a flat at Rs 30,000 a month. In an earlier year the tenant did not pay for 3 months (Rs 90,000), and that rent was left out of her actual rent under section 21(4). In 2026-27 the tenant pays Rs 60,000 of it. She also receives Rs 1,50,000 of arrears for a back-dated rent increase on a different flat.

Step	Unrealised rent	Arrears	Total
1. Received in 2026-27	60,000	1,50,000	2,10,000
2. Less 30%, s 23(3)	18,000	45,000	63,000
3. Taxable under s 23	42,000	1,05,000	1,47,000

Check: 30% of 60,000 is 18,000 and 60,000 - 18,000 is 42,000. 30% of 1,50,000 is 45,000 and 1,50,000 - 45,000 is 1,05,000. 42,000 + 1,05,000 is 1,47,000. The balance of Rs 30,000 of unrealised rent is taxed in whichever year it is eventually realised.

Does section 23 apply if I have sold the property?

Yes. Section 23(2) says the amount is included in your total income whether or not you are the owner of the property in that tax year.

Real-life example: Anil sold his rented flat in 2025-26. The tenant had a pending dispute over the rent for the last few months, and in 2026-27 the tenant pays Anil Rs 40,000 of that rent. Anil no longer owns the flat, but the Rs 40,000 is still income from house property for 2026-27. After the 30% deduction of Rs 12,000, Rs 28,000 is taxable in his hands.

What if the rent revision is paid in one lump sum?

Real-life example: Sunita's tenant agrees in 2026-27 to a higher rent that applies from two years back. He pays the extra amount for the past months in one go. For Sunita, the extra amount for the past months is arrears of rent, taxed in 2026-27 under section 23 with the 30% deduction. The new, higher rent for the months of 2026-27 itself is ordinary rent for that year and is handled through the annual value rules in section 21.

How does section 23 fit with the normal house property computation?

Section 23 is a separate stream of income under the same head. The usual 30% deduction under section 22(1)(a) is calculated on the annual value determined under section 21. Section 23(3) gives its own 30% on the arrears or unrealised rent. They do not overlap, because the late-received amount is not part of the current year's annual value. For the annual value rules, see our guide on income from house property: annual value and the standard deduction.

Can I claim loan interest or other deductions against arrears of rent?

Section 23(3) allows one deduction on arrears and unrealised rent: 30% of the amount. The interest deduction in section 22(1)(b) and (c) sits in section 22, which works on the annual value under section 21, and the late-received amount is not part of that annual value. Section 23 itself provides no separate deduction for interest or other costs, so apply only the 30% to the late-received amount.

Quick reference: section 23 at a glance

Question	Answer	Provision
Which year is it taxed in?	The year the rent is received or realised	s 23(1)
Which head?	Income from house property	s 23(2)
Must you still own the property?	No	s 23(2)
Deduction	30% of the amount	s 23(3)
Is actual repair or collection cost needed?	No, the 30% is a fixed percentage	s 23(3)
Where was unrealised rent left out earlier?	Actual rent, subject to rule 21	s 21(4)

What are the common mistakes with arrears and unrealised rent?

• Taxing it in the year it was due. The year of receipt is the year of tax under section 23(1).
• Forgetting the 30% deduction. It is allowed on the full arrears or unrealised rent under section 23(3).
• Dropping it after a sale. Section 23(2) applies even if you no longer own the property.
• Treating unrealised rent as taxable in the earlier year. Rent is excluded from actual rent under section 21(4) only if the conditions of rule 21 are met (bona fide tenancy, tenant vacated or steps taken, no other property of yours occupied, legal steps taken or shown to be futile). Confirm them before you exclude it.
• Leaving out a part payment. Each amount received is taxed when received. A partial recovery is taxed in that year, and the rest in the year it is realised.
• Mixing it with current rent. Keep a separate record of late-received rent so the 30% is applied on the right amount.

How do CA firms keep track of late-received rent for clients?

Arrears often arrive months after the original rent was due, and they are easy to miss at return time. A CA firm needs a client-wise note of rent left out as unrealised in earlier years and what has been recovered since. Finexo's practice management software lets you keep such notes and follow-ups against each client, so they surface before the return is prepared. It does not compute the tax for you.

Where is this in the Act?

• Section 23(1): arrears and unrealised rent are income of the year of receipt or realisation.
• Section 23(2): included under "Income from house property", whether or not you own the property.
• Section 23(3): 30% deduction.
• Section 21(4): rent that cannot be realised is excluded from actual rent, subject to rule 21 of the Income-tax Rules, 2026.
• Section 22(1)(a): the separate 30% deduction on annual value.

This article explains the Income Tax Act 2025 (as amended by the Finance Act 2026). It is general information, not tax advice. Confirm the position for a specific case with a qualified chartered accountant.