# Treatment of Unrealised Rent

## Concept

Where a tenant defaults and rent cannot be realised, the assessee should not be taxed on rent he never received.

## Formula

```

Actual Rent = Rent Received / Receivable (-) Unrealised Rent

```

This adjusted Actual Rent is then compared with Expected Rent to arrive at GAV.

## Rule 4 Conditions (ALL must be satisfied)

Unrealised rent is deductible only if:

1. Tenancy is bona fide (genuine and real).

2. The defaulting tenant has vacated the property, OR steps have been taken to compel him to vacate.

3. The defaulting tenant is not in occupation of any other property of the assessee.

4. The assessee has taken all reasonable steps to initiate legal proceedings for recovery, OR satisfies the AO that legal proceedings would be useless.

## Two Equivalent Presentations

### Method 1 (as per Provisions)

```

Actual Rent = Rent Recd/Recble (-) Unrealised Rent

GAV = Higher of Actual Rent or Expected Rent

(-) Municipal Taxes

= NAV

```

### Method 2 (as per Return / Format)

```

GAV (using gross Actual Rent) xxx

(-) Municipal Taxes (xxx)

(-) Unrealised Rent (xxx)

NAV xxx

```

Both methods give the same NAV.

Worked example

### Example 1

Example: MV = ₹2,00,000; FR = ₹2,40,000; SR = ₹2,20,000. Rent receivable = ₹25,000 p.m. Tenant defaulted for 3 months. Rule 4 conditions met.

Expected Rent = Lower of (Higher of MV/FR) and SR = Lower of (2,40,000) and (2,20,000) = ₹2,20,000
Gross Rent Receivable = 25,000 × 12 = ₹3,00,000
Unrealised Rent = 25,000 × 3 = ₹75,000
Actual Rent = 3,00,000 − 75,000 = ₹2,25,000
GAV = Higher of ₹2,20,000 and ₹2,25,000 = ₹2,25,000

⚠️ Common exam mistakes

Reducing unrealised rent without verifying Rule 4 conditions.
Reducing unrealised rent from Expected Rent rather than from Actual Rent.
Forgetting that the defaulting tenant must not be in occupation of any other property of the assessee.
Claiming unrealised rent for SOP — irrelevant since no rent question arises.

Bare-Act text Rule 4 / Explanation to Section 23(1) · Income-tax Rules, 1962 read with Section 23(1) Explanation · click to expand

Rule 4 of Income-tax Rules, 1962: For the purposes of the Explanation below sub-section (1) of section 23, the amount of rent which the owner cannot realise shall be equal to the amount of rent payable but not paid by a tenant of the assessee and so proved to be lost and irrecoverable where — (a) the tenancy is bona fide; (b) the defaulting tenant has vacated, or steps have been taken to compel him to vacate the property; (c) the defaulting tenant is not in occupation of any other property of the assessee; (d) the assessee has taken all reasonable steps to institute legal proceedings for the recovery of the unpaid rent or satisfies the Assessing Officer that legal proceedings would be useless.

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Treatment of Unrealised Rent (Rule 4)

Worked example

⚠️ Common exam mistakes