Exclude only rent that meets the statutory evidence test
For tax year 2026–27 under the Income-tax Act, 2025, section 21(4) excludes qualifying unrealised rent from actual rent received or receivable. Rule 21 of the Income-tax Rules, 2026 requires the unpaid rent to be proved lost and irrecoverable. A ledger ageing or an accounting loss allowance does not by itself establish the exclusion. FY 2025–26 for AY 2026–27 uses section 23 of the 1961 Act and rule 4 of the 1962 Rules.
Read the applicable text: Income-tax Act, 2025: sections 21, 23 and 536 Gazette: Income-tax Rules, 2026, rule 21.
Apply each Rule 21 condition to the tenant
The tenancy must be genuine. The defaulting tenant must have vacated or the owner must have taken steps to compel vacancy. Check that the tenant does not occupy any other property of the assessee. The assessee must have taken all reasonable steps to institute recovery proceedings or satisfy the Assessing Officer that proceedings would be futile. Preserve the lease, demands, possession evidence, checks across properties and the legal recovery file.
Separate arrears from other shortfalls
Reconcile contracted rent, receipts, valid concessions and the outstanding balance. An unpaid deposit, maintenance dispute or amount that never became receivable is a different question. Track the qualifying rent by period and tenant. Where only part can be proved irrecoverable, leave the balance in the actual-rent working unless another supported treatment applies.
Recompute annual value and maintain a recovery trail
Adjust the actual-rent input under section 21(4) and then compare it under the applicable annual-value provisions, including section 21(2) where vacancy conditions are met. A lower actual-rent figure does not necessarily lower annual value if expected rent still governs. Maintain the excluded amounts by tenant and apply section 23 to amounts later realised where applicable. It taxes the recovery in the receipt year under house property even if the recipient no longer owns the property and allows a deduction of 30% of the recovered amount.
Six worked illustrations
All facts and amounts are fictional. Calculations illustrate the stated assumptions, not a predetermined legal outcome.
Illustrative example 1: Actual-rent input after exclusion
Rent receivable is ₹1,200,000, of which ₹900,000 is collected. Assume ₹300,000 is proved irrecoverable and all Rule 21 conditions hold. Actual rent after the exclusion is ₹900,000, before the annual-value comparison.
Illustrative example 2: Only part is supported
Of ₹180,000 unpaid, only ₹110,000 is proved to qualify. On rent receivable of ₹780,000, the actual-rent input is ₹670,000; ₹70,000 of the unpaid amount remains included.
Illustrative example 3: Other premises occupied
A defaulting tenant owes ₹200,000 but still occupies another property of the same assessee. With ₹950,000 rent receivable and no other adjustment, the Rule 21 exclusion is nil and the actual-rent input remains ₹950,000.
Illustrative example 4: Expected rent still governs
Assume ₹100,000 qualifies out of ₹820,000 rent receivable. Adjusted actual rent is ₹720,000. With expected rent of ₹760,000 and no applicable vacancy exception, the starting annual value before local levies is ₹760,000.
Illustrative example 5: Identify non-rent amounts
A tenant balance of ₹160,000 comprises ₹100,000 of qualifying unpaid rent and ₹60,000 of separately disputed non-rent charges. The Rule 21 rent exclusion is ₹100,000, not the full balance.
Illustrative example 6: Two tenants with different evidence
Two tenants have unpaid rent of ₹150,000 and ₹50,000. Only the second file meets all Rule 21 conditions. Of the ₹200,000 outstanding, exclude ₹50,000 from actual rent and keep ₹150,000 in the review population.
Ten-step verification table
| Step | Action | Evidence |
|---|---|---|
| 1 | Establish the letting and tax period | Lease, title and period mapping. |
| 2 | Reconcile rent receivable | Rent roll and receivables ledger. |
| 3 | Match receipts and valid adjustments | Bank evidence and agreements. |
| 4 | Verify genuine tenancy | Executed terms and tenant records. |
| 5 | Check vacancy or steps to compel it | Handover, notice or legal evidence. |
| 6 | Check other properties occupied by the tenant | Company-wide tenancy register. |
| 7 | Document recovery steps or futility | Legal correspondence and supporting facts. |
| 8 | Quantify only proved irrecoverable rent | Tenant-level exclusion schedule. |
| 9 | Recompute the applicable annual value | Actual and expected rent bridge. |
| 10 | Track subsequent collections | Recovery register and receipt-year review. |
Sixteen practitioner FAQs
1. Does an overdue amount qualify automatically?
No. Prove irrecoverability and the Rule 21 conditions.
2. Does a book impairment prove the tax exclusion?
No. Retain independent statutory evidence.
3. Must the lease be genuine?
Yes.
4. Must the tenant have already vacated?
Vacancy or steps to compel it can satisfy that limb.
5. What if the tenant occupies another property of the owner?
The corresponding Rule 21 condition is not met.
6. Must litigation always be filed?
The rule also allows the assessee to satisfy the Assessing Officer that proceedings would be futile.
7. Does a general overdue notice prove all reasonable recovery steps?
It is evidence, but assess the full recovery circumstances.
8. Can the company exclude a security deposit?
Rule 21 concerns unpaid rent receivable.
9. What if the parties reduced the rent contractually?
Determine the enforceable rent first.
10. Is the adjustment a deduction after standard deduction?
No. It adjusts the actual-rent input.
11. Does an exclusion always reduce annual value?
No. The applicable comparison or vacancy rule may determine the result.
12. Are unpaid rent and physical vacancy identical?
No. Establish each separately.
13. What if part of the arrears is recoverable?
Exclude only the qualifying amount.
14. What if a later collection arrives?
Trace it to section 23 where applicable.
15. Is Rule 21 used for FY 2025–26 returns?
No. Use the rules under the applicable earlier enactment.
16. What makes the working reviewable?
A tenant-level evidence trail tied to rent, possession, recovery efforts and the tax computation.
Official sources
Income-tax Act, 2025: sections 21, 23 and 536 Gazette: Income-tax Rules, 2026, rule 21