Start with the receipt and the underlying tenancy
Section 23 of the Income-tax Act, 2025 treats qualifying arrears received from a tenant and unrealised rent later recovered from a tenant as house-property income of the tax year of receipt or realisation. Ownership in that year is not necessary. Subsection (3) allows a deduction of 30% of the qualifying recovery. A company that sold the property therefore still needs a receipt-year computation if it subsequently recovers qualifying rent.
Read the applicable text: Income Tax Department: Income-tax Act, 2025, sections 23 and 536.
Separate old and new tax periods
This working addresses tax year 2026–27 beginning 1 April 2026. The earlier FY 2025–26 return for AY 2026–27 is under the 1961 Act; section 25A of that Act contains the comparable receipt-year rule and 30% deduction. Establish which law governs each receipt and use the repeal and savings rules where events cross the change. Keep old tenancy and tax records: a prior-year ledger posting does not decide current receipt-year treatment.
Classify each component of the collection
Start with the lease, period of occupancy, arrears schedule, bank receipts and allocation terms. Split current rent, qualifying arrears, previously unrealised rent, security deposits, interest and other amounts. A settlement label does not convert every component into rent. Where a property has changed hands, verify whether the seller retained the right to the old receivable or assigned it and identify who actually received the money and in what capacity.
Prevent duplicate income and deductions
Match each amount to earlier house-property computations and establish why it qualifies under section 23. Escalate any sum already taxed, or an ambiguous amount allocated across debts, before making a new inclusion. Compute the 30% deduction on the qualifying gross amount once. Keep ordinary current-year annual value and its deductions in a separate bridge; do not reduce the same arrears a second time as ordinary annual-value income. The examples compute the section 23 component before any set-off or final tax. Where cash received is net of tax deducted at source, reconcile the gross recovery and withholding evidence separately.
Reconcile the return to books and bank
Show gross receipt, rent classified under section 23, statutory deduction and net income in the tax workpaper. If collection was credited to a receivable rather than book income, explain why the tax computation still includes the qualifying amount. If the recovery was credited to income, reconcile the classification and deduction without including the gross receipt twice.
Six worked illustrations
All facts and amounts are fictional. Calculations illustrate the stated assumptions, not a predetermined legal outcome.
Illustrative example 1: Receipt after sale
A company retains a rental arrears claim after sale and collects qualifying arrears of ₹240,000 in the tax year. The deduction is ₹72,000 and the section 23 component is ₹168,000.
Illustrative example 2: Separate settlement components
A ₹300,000 settlement includes ₹180,000 of qualifying arrears and ₹120,000 documented as consideration for other items. The section 23 deduction is ₹54,000 and its net component ₹126,000. Analyse the ₹120,000 separately.
Illustrative example 3: Two collections in different years
A tenant pays qualifying arrears of ₹100,000 in March 2027 and ₹60,000 in April 2027. The March deduction is ₹30,000 and the April deduction is ₹18,000. The net amounts are ₹70,000 for tax year 2026–27 and ₹42,000 for tax year 2027–28; the agreement alone does not accelerate the April receipt.
Illustrative example 4: Partial recovery of unrealised rent
A ₹350,000 previously unrealised qualifying balance yields an actual recovery of ₹140,000 in the year. The deduction is ₹42,000, net income ₹98,000 and the remaining unrecovered claim ₹210,000.
Illustrative example 5: Book credit reconciled to tax
A company credits ₹90,000 of qualifying arrears in current profit. The house-property component is ₹63,000 after a ₹27,000 deduction. Carry only ₹63,000 into taxable income for that item, with the book-to-tax bridge removing the gross book credit from any starting profit calculation that would duplicate it.
Illustrative example 6: Two properties in one company
The company recovers ₹55,000 and ₹45,000 of qualifying arrears across two tenants. Total gross recovery is ₹100,000, total deduction ₹30,000 and net income ₹70,000. Retain both tenant trails.
Ten-step verification table
| Step | Action | Evidence |
|---|---|---|
| 1 | Identify the lessor and recipient | Lease, sale deed, assignment and bank details. |
| 2 | List the rent periods and tenants | Invoice or demand schedule by property. |
| 3 | Reconcile collection dates | Bank credits and payment advice. |
| 4 | Confirm actual receipt capacity | Agency, escrow or remittance records where applicable. |
| 5 | Match earlier tax treatment | Earlier computations, returns and operative orders. |
| 6 | Allocate mixed settlements | Settlement agreement and supporting ledgers. |
| 7 | Select the applicable enactment | Receipt date and period mapping. |
| 8 | Compute the single deduction | Gross qualifying recovery and 30% schedule. |
| 9 | Reconcile books to tax | Profit, receivable and return working. |
| 10 | Retain closing receivable evidence | Tenant reconciliation and approved tax review. |
Sixteen practitioner FAQs
1. Does section 23 require ownership in the receipt year?
No. The provision expressly covers qualifying receipts even where the assessee no longer owns the property.
2. Does signing a settlement establish receipt?
No. Verify when the rent is received or realised.
3. Does section 23 classify a refundable deposit as rent?
Not merely because it was received from a tenant. Check the legal character and use of the deposit.
4. Is every old rent ledger balance qualifying unrealised rent?
No. Verify the legal treatment and prior computation.
5. Does a property buyer automatically report the seller’s recovery?
No. Identify the rights, parties and capacity in which the amount was received.
6. What if a bank payment contains both interest and rent?
Allocate under the evidence and analyse interest separately.
7. Can the deduction be claimed at 30% of the unpaid balance?
No. Apply it to qualifying arrears or unrealised rent received or realised.
8. Can the 30% be deducted twice?
No. The recovery requires a single statutory deduction.
9. Does the figure represent final tax payable?
No. It is an income component before the rest of the computation.
10. Does the section reopen the year in which rent originally fell due?
Its rule allocates a qualifying recovery to the receipt or realisation year.
11. What if the accounts credit a receivable?
Reconcile that posting to the statutory tax inclusion.
12. What if the rent was already taxed?
Trace the earlier treatment and resolve the potential duplicate inclusion before filing.
13. Should prior-year receipts use section 23 mechanically?
No. Check the enactment applicable to the year of receipt and transition.
14. How should multiple properties be reconciled?
Keep separate tenant and property records feeding one supported total.
15. Does partial payment recognise the entire outstanding claim?
No. Quantify the actual qualifying recovery for the year.
16. Which papers are essential after sale?
Keep the lease, sale or assignment terms, historic tax records and bank trail.
Official sources
Income Tax Department: Income-tax Act, 2025, sections 23 and 536