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June 2, 2020

Not received Rent from Property during Lockdown? Know if Rent will be Taxed as per Agreement or Receipt?

by Mahesh Mara in Income Tax

Not received Rent from Property during Lockdown? Know if Rent will be Taxed as per Agreement or Receipt?

In India there is lockdown since 25th March 2020 almost two months have been passed under the lockdown the salaried person is not getting salary properly due to which individuals staying in rented house property facing difficulties to pay rent to the landlord properly. The Landlord is also losing income in this lockdown and having fear about the tax impact on rent income not received. In this article we will learn about the types of rent under the income tax act and conclude if Rent is taxable as per Leave License Agreement or will be taxed as actual received in bank account

Not received Rent from property during Lockdown? Will Unrealized Rent Income be Taxable?
Not received Rent from property during Lockdown? Will Unrealized Rent Income be Taxable?

The various type of rent under Income tax act are as follows:

  1. Fair rent: It means rent of property in same locality. It is also known as reasonable rent
  2. Standard rent: it means rent as per rent control act. It is the maximum amount of rent that can be legally recovered by the owner from tenant.
  3. Actual rent: It is rent received or receivable from the tenant during the year.
  4. Notional rent: It is the rent which you are presumed to earn from a residential property even if you don’t happen to actually earn any rent. This rent is taxable as per the Income Tax Act, 1961 in case you have more than 2 property which are not letout
  5. Arrears of rent: It means rent under dispute from the tenant and can be received
  6. Unrealized rent: Unrealised rent is the portion of your house rent amount which is not realised from the tenant for some reason.

Taxability of rent during lockdown period:

In the current lock down situation the assessee having Income from house property will be facing two problems with respect to rent income which is discussed as below:

A. Rent receivable: In this case the rent is receivable from the tenant which is payable by the tenant in the near future. In this case the rent is taxable in the same assessment year even if not received. Rent is considered as rent receivable if following conditions are satisfied:

  • Tenancy should be bonafide.
  • Tenant should not vacate that house property.

Tax treatment of rent receivable: In case where the rent receivable in the near future by the land lord than such rent is calculated as follows:

 ParticularsAmount
aMunicipal ValueXXX
bFair rentXXX
cHigher of a or bXXX
dStandard rentXXX
e(Lower of c or d) Expected rent XXX
fActual rent or rent recivableXXX
gGross annual value (higher of e or f)XXX

For Instance,

Mr. X is having one property and it is let out to Mr. Y for Rs. 20,000 per month for 12 months. Mr. X is also paying municipal tax on the property of Rs. 10,000 per annum. The other details of house property are as follows:

ParticularAmount
Municipal value2,00,000
Fair rent2,20,000
Standard rent2,00,000

Calculate the Income from house property in the hands of Mr. X.

 ParticularsLet out property
aMunicipal Value2,00,000
bFair rent2,20,000
cHigher of a or b2,20,000
dStandard rent2,00,000
e(Lower of c or d) Expected rent 2,00,000
fActual rent2,40,000
gGross annual value (higher of e or f)2,40,000
hLess: Municipal tax10,000
iNet Annual Value2,30,000
jLess: Standard deduction of 30% of Net annual value(69,000) (2,30,000 X 30%)
kLess: interest on housing loan0
lIncome from House Property1,61,000

The above income is taxable in the hands of Mr. X and added in the total income of Mr. X

B. Unrealized rent: In this case the tenant has vacated the property and has not paid the rent to the landlord. Unrealised rent is the portion of your house rent amount which is not realised from the tenant for some reason. It is like bad debts of rent; it is deductible while calculating actual rent if following four conditions of rule 4 are satisfied:

  • Tenancy should be bonafide.
  • Tenant should have vacated that house property.
  • Such tenant should not occupy any other house property of same assessee.
  • Reasonable step should have been taken for recovery of unrealised rent.

What if you have not received rent during lockdown or have revised agreement to receive lower rent

The major problem faced by landlord is they have either received no rent as tenant has vacated the property or have not received rent for 2 months of April and May

In case the Rent is not received for 2 months, the calculation will be as follows

Sr NoParticularsRupees
1Rent as per Agreement (Rs 50,000 per month)6,00,000
2Less : Rent unrealised because of Lockdown, or tenant not paying for 2 months  100,000
3Rent Taxable5,00,000
4Less : 30% Standard Deduction1,50,000
5Taxable Rental Income3,50,000

In case the Rent is not received for 2 months, and Agreement is revised downwards then the calculation will be as follows

Sr NoParticularsRupees
1Rent as per Agreement (Rs 50,000 per month)6,00,000
2Rent unrealised because of Lockdown, or tenant not paying for 2 months  100,000
3Rent Taxable as per Agreement5,00,000
4Rent as per revise agreement ( Rs 30,000) per month for 10 months3,00,000
530% Standard Dedction90,000
4Taxable Income2,10,000

Landlord need to ensure than revised LL agreement is executed and kept in records in case of downward revision of rent

Taxability of unrealized rent received later or next year

Unrealized rent is taxable as and when recovered. It is taxable in the year in which it is recovered by the landlord under the head house property, whether the assessee is the owner of the property or not in that financial year. Any expense incurred for such recovery shall be ignored.

In case you receive rent which was not received during lockdown in next financial year then it will be taxable in next financial year

The unrealized rent is calculated as follows:

Taxable amount = Recovered rent X 70% (30% standard deduction) – rent disallowed earlier

Where, Recovered rent is the rent recovered from the tenant

Rent disallowed earlier: It is rent claimed as unrealized rent but disallowed by the assessing officer.

For instance,

Mr. X has not received rent for 2 months amounting to Rs. 50,000 for previous year 2020-21 from Mr. Y. Mr. X has recovered the rent of Rs. 50,000 from Mr. Y. during FY 2021-22 Mr. X has claimed deduction of Rs. 50,000 as unrealised rent in FY 2020-21 but the assessing officer has allowed only Rs. 30,000 and disallowed the balance Rs. 20,000 rent and added back to Income of Mr. X.

Let us calculate the amount of rent taxable in the hands of Mr. X

Taxable rent amount: (50000 X 70%) – 20000 = Rs. 15,000 in FY 2021-22

Conclusion, in case if rent is not received or agreement is revised during lockdown and post Coronavirus Pandemic , Landlord has to pay tax only on actual receipt of rent in the bank statement provided all the rules as mention above are followed

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