Arrears/Unrealised Rent and Co-ownership: Income Tax Act, 2025

Rental income does not always arise in the same year in which it becomes due. A landlord may recover unpaid rent several years later, receive additional rent after settlement of a dispute, or even collect such amounts after selling the property.

The Income-tax Act, 2025 contains specific rules for dealing with such situations. Section 23 governs the taxation of arrears of rent and unrealised rent recovered subsequently, while section 24 deals with the computation of income where a property is owned jointly by two or more persons.

What is Arrears of Rent?

Arrears of rent generally arise when a landlord becomes entitled to receive additional rent relating to an earlier period but actually receives the amount later.

This may happen, for example, because of:

• A retrospective increase in rent
• Settlement of a rent dispute
• Revision of rent under an agreement
• Delayed determination of rent payable by the tenant
• Recovery of an additional amount relating to an earlier tenancy period

Example

Nitin lets out an office for ₹40,000 per month.

During Tax Year 2026-27, he and the tenant settle an earlier dispute and the tenant agrees to pay an additional ₹5,000 per month for the 12 months of Tax Year 2025-26.

Nitin receives the additional ₹60,000 during Tax Year 2026-27.

The ₹60,000 represents arrears of rent and is considered in the year in which it is actually received.

What is Unrealised Rent?

Unrealised rent refers to rent that was payable by a tenant but could not actually be recovered by the landlord.

In determining the annual value of a let-out property, qualifying unrealised rent may have been excluded from actual rent where the prescribed conditions were satisfied.

If such rent is subsequently recovered, the Act contains a separate rule for taxing the amount in the year of recovery.

Example

Kavita had let out a residential flat at ₹30,000 per month.

A former tenant failed to pay rent of ₹60,000. The qualifying amount was treated as unrealised rent while computing property income in the relevant earlier year.

Two years later, Kavita recovers ₹45,000 from the former tenant as final settlement.

The ₹45,000 recovered subsequently is considered under section 23 in the tax year in which Kavita receives it.

When are Arrears and Recovered Unrealised Rent Taxable?

Section 23 provides that arrears of rent received or unrealised rent recovered subsequently are taxable in the tax year in which the amount is received or realised.

Is Ownership Required in the Year of Receipt?

No. One of the important features of section 23 is that the taxpayer does not need to continue owning the property in the year in which the arrears or recovered unrealised rent are received.

The receipt can still be taxed under the head "Income from house property".

Example: Rent Received After Sale of Property

Sameer owned a house which he had rented to a tenant. Rent of ₹80,000 remained unpaid when the tenant vacated.

Sameer subsequently sold the property.

In Tax Year 2026-27, after the sale had already taken place, the former tenant pays Sameer ₹50,000 towards the outstanding rent.

The fact that Sameer no longer owns the property does not prevent the recovered amount from being considered under the head "Income from house property" in the year of recovery.

30% Deduction on Arrears and Recovered Unrealised Rent

Section 23 allows a deduction equal to 30% of the arrears of rent or subsequently recovered unrealised rent.

The balance amount is taxable under the head "Income from house property".

Example

Assume Ananya receives:

• Arrears of rent: ₹90,000
• Recovered unrealised rent: ₹30,000

Total amount received = ₹1,20,000.

Deduction at 30%:

₹1,20,000 × 30% = ₹36,000

Taxable amount:

₹1,20,000 – ₹36,000 = ₹84,000

Quick Treatment of Arrears and Unrealised Rent

What is a Co-owned House Property?

A property is co-owned when two or more persons hold ownership rights in the same property.

Common examples include:

• A house jointly purchased by spouses
• Property inherited by siblings
• A residential flat jointly purchased by parents and children
• Commercial premises acquired jointly by two individuals

Section 24 contains specific rules for determining income from such properties.

When are Co-owners Taxed Separately?

Where the shares of the co-owners are definite and ascertainable, the co-owners are not assessed together as an Association of Persons merely because they jointly own the property.

Instead, income attributable to each co-owner is computed according to their respective ownership share and included in their individual tax computation.

Example

Rakesh and Pooja jointly own a residential property.

• Rakesh's ownership share: 60%
• Pooja's ownership share: 40%

If income from the property after applying the house-property computation provisions is ₹5,00,000:

• Rakesh's share = ₹3,00,000
• Pooja's share = ₹2,00,000

Each person includes their respective amount in their own tax computation.

Co-owned Property that is Let Out

Where a jointly owned property is let out, the property income is generally calculated as if the property were owned by a single owner.

After computing the final income from the property, the amount is divided among the co-owners according to their definite ownership shares.

Example: Jointly Owned Let-Out Property

Aarav and Ishita jointly own a property in equal shares.

The property has the following figures:

• Gross Annual Value: ₹8,00,000
• Municipal taxes paid: ₹80,000
• Interest on housing loan: ₹1,50,000

Step 1: Calculate Net Annual Value

₹8,00,000 – ₹80,000 = ₹7,20,000

Step 2: Deduct 30% of NAV

₹7,20,000 × 30% = ₹2,16,000

Step 3: Deduct Eligible Interest

₹7,20,000 – ₹2,16,000 – ₹1,50,000 = ₹3,54,000

Step 4: Divide Between Co-owners

Since both own the property equally:

• Aarav's share = ₹1,77,000
• Ishita's share = ₹1,77,000

Self-occupied Property Owned by Co-owners

Where a house property is jointly owned and used for self-occupation by the co-owners, the annual value attributable to each qualifying co-owner may be treated as Nil, subject to the applicable house-property provisions.

Interest on borrowed capital may also be considered separately in the hands of each co-owner according to their share and subject to the tax regime selected by that co-owner.

Home Loan Interest for Co-owned Self-occupied Property

If the co-owners have exercised the option of shifting out of the default tax regime, each co-owner may be entitled to the applicable interest deduction under section 22, subject to the relevant conditions and limits.

Depending upon the nature of the borrowing, the applicable ceiling may be ₹2,00,000 or ₹30,000.

Example

Aditya and his sister Neha jointly own a residential house in equal proportions.

Eligible interest on the acquisition loan for the tax year is ₹3,60,000.

Their respective shares of interest are:

• Aditya: ₹1,80,000
• Neha: ₹1,80,000

If both independently satisfy the conditions for the higher interest deduction and both have validly shifted out of the default tax regime, each may consider deduction of ₹1,80,000 in their respective computation.

The applicable limits are examined separately for each co-owner rather than treating ₹2,00,000 as one combined ceiling for the entire property.

What Happens under the Default Tax Regime?

Where a co-owner pays tax under the default tax regime under section 202(1), interest deduction for a qualifying self-occupied property is not available under the house-property provisions.

Example

Suppose Aditya and Neha in the previous example both pay tax under the default tax regime.

Their annual value for the qualifying self-occupied property may remain Nil, but the self-occupied home-loan interest deduction would not be available.

Co-owner Also Owning Another Self-occupied Property

The home-loan interest ceiling applies to the co-owner as a taxpayer, not independently to each house.

Therefore, where a co-owner also owns another self-occupied or qualifying unoccupied property, eligible interest from both properties has to be considered together for applying the relevant aggregate ceiling.

Example

Karan owns a 50% share in a jointly owned self-occupied property and also owns another self-occupied flat individually.

His eligible interest amounts are:

• Share of interest from jointly owned property: ₹1,40,000
• Interest on individually owned property: ₹90,000

Total = ₹2,30,000.

If both qualify for the higher ceiling, the aggregate deduction would be restricted to ₹2,00,000, subject to the applicable conditions.

Ownership Share Should Be Clear

The separate taxation treatment under section 24 is particularly relevant where the ownership shares are definite and ascertainable.

Taxpayers should therefore ensure that their ownership documents clearly establish each person's share wherever possible.

Relevant documents may include:

• Sale deed or purchase agreement
• Gift deed
• Will or succession documents
• Partition or family settlement documents
• Housing loan documents
• Evidence showing each co-owner's ownership rights

Does Payment of EMI Decide Ownership Share?

Merely paying part of the housing-loan EMI should not automatically be assumed to determine the legal ownership percentage.

Ownership share should be examined from the title documents, acquisition arrangement and other relevant facts.

Similarly, eligibility for interest deduction should be examined with reference to the taxpayer's ownership, borrowing obligation and applicable statutory conditions.

Arrears Received from a Co-owned Property

Where arrears of rent or recovered unrealised rent relates to a co-owned property, the amount attributable to each co-owner should be considered according to the applicable ownership rights and the provisions governing such receipt.

Example

Two sisters, Mira and Tara, owned a rented house equally.

During Tax Year 2026-27, they receive ₹1,00,000 of arrears relating to an earlier tenancy.

Assuming both are entitled equally to the arrears:

• Mira's share = ₹50,000
• Tara's share = ₹50,000

Each would consider the applicable 30% deduction under section 23 on her respective share while computing income from house property.

Common Mistakes to Avoid

• Taxing arrears in the year to which they relate: Section 23 taxes qualifying arrears in the year in which they are received.
• Ignoring recovered unrealised rent: Rent excluded earlier may become taxable when subsequently recovered.
• Assuming sale of the house eliminates taxability: Arrears or unrealised rent can remain taxable even when the taxpayer no longer owns the property in the year of receipt.
• Forgetting the 30% deduction: Section 23 specifically allows a 30% deduction on qualifying receipts.
• Dividing gross rent between co-owners before completing the property computation: For a let-out property, compute income for the property first and then apportion it according to the respective shares.
• Assuming jointly owned property is automatically taxed as an AOP: Where shares are definite and ascertainable, the co-owners are separately assessed on their respective shares.
• Claiming a separate ₹2 lakh interest limit for every self-occupied house: The relevant aggregate ceiling applies at the taxpayer level.

Conclusion

Sections 23 and 24 address two situations that can easily lead to incorrect reporting of house-property income.

Arrears of rent and subsequently recovered unrealised rent are generally taxed in the year of receipt or recovery, with a 30% deduction. Importantly, such receipts can remain taxable as income from house property even if the taxpayer no longer owns the house when the money is received.

For jointly owned properties, the key consideration is whether each co-owner's share is definite and ascertainable. In that case, each co-owner is generally taxed separately according to their share rather than the owners being taxed together merely because the property is jointly held.

Proper documentation of ownership percentages, rental receipts, outstanding rent and housing-loan interest is therefore important for accurately computing income from a co-owned property.

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