Section 23 of the Income-tax Act, 2025 taxes arrears of rent and subsequently realised unrealised rent as house property income in the year of receipt. It applies whether or not the assessee still owns the property, and a flat 30% of the amount is allowed as a deduction.
What section 23 does
Section 21(4) keeps unrealised rent out of the annual value. Section 23 is the other half of that bargain: when the money finally arrives, it is taxed. The same treatment applies to arrears of rent.
The provision has two features that surprise taxpayers. It taxes the receipt in the year of receipt regardless of which year the rent related to, and it applies whether or not the assessee is still the owner of the property in that year.
To soften that, sub-section (3) allows a flat 30% deduction on the arrears or unrealised rent, mirroring the standard deduction in section 22(1)(a).
The Income-tax Act, 2025 takes effect from 1 April 2026 and applies from tax year 2026-27. The Income-tax Act, 1961 continues to govern every year up to 31 March 2026, including assessments, appeals and penalties for those years, because of the repeal and savings provision in section 536. Figures quoted here are the amounts written into the Act as enacted (with the Gazette corrigenda of 3 September 2025); the annual Finance Act can change rates and thresholds.
Old Act and new Act, side by side
The table below shows what the Income-tax Act, 1961 did and where the same ground is covered in the Income-tax Act, 2025.
| Income-tax Act, 1961 | What it did | Income-tax Act, 2025 |
|---|---|---|
| 25A | Arrears of rent and unrealised rent taxed on receipt with 30% deduction | 23 |
| 23(1), proviso | Unrealised rent excluded from actual rent | 21(4) |
| 24(a) | 30% standard deduction on annual value | 22(1)(a) |
Section 23 sub-section by sub-section
Read this alongside the bare text — each heading below is a sub-section of the section as enacted.
Sub-section (1) — taxed in the year of receipt
Arrears of rent received from a tenant, or unrealised rent realised subsequently from a tenant, are deemed to be income from house property in the tax year in which they are received or realised. The year the rent originally related to is irrelevant — there is no reopening of the earlier year.
Sub-section (2) — ownership is not required
The amount is included in total income under the head Income from house property whether the assessee is the owner of the property or not in that tax year. So a landlord who sold the property, or whose tenancy ended years earlier, is still taxed under this head when the old dues are recovered.
Sub-section (3) — the flat 30% deduction
A sum equal to 30% of the arrears of rent or the unrealised rent referred to in sub-section (1) is allowed as a deduction. No other deduction is provided against this receipt — in particular, interest under section 22(1)(b) is not available against it.
Worked example
A landlord let a shop until 2024-25. A tenant defaulted, and the unpaid rent was excluded from annual value under section 21(4) at the time. The property was sold in 2025-26. In tax year 2026-27 the landlord recovers the dues after a court decree.
| Item | Working | Amount |
|---|---|---|
| Unrealised rent of 2023-24 and 2024-25 recovered in 2026-27 | Taxed in 2026-27 under section 23(1) | ₹4,80,000 |
| Arrears of rent for 2024-25 received in 2026-27 | Taxed in 2026-27 under section 23(1) | ₹1,20,000 |
| Total | ₹6,00,000 | |
| Less: deduction under section 23(3) | 30% of ₹6,00,000 | (₹1,80,000) |
| Taxable under house property in 2026-27 | ₹4,20,000 |
The landlord no longer owns the shop, but sub-section (2) makes that irrelevant. The earlier years are not reopened, and no interest deduction is available against this amount.
Compliance checklist and due dates
- Maintain a schedule of rent excluded as unrealised under section 21(4), so recoveries can be identified and offered under section 23.
- Offer the recovery in the year of receipt; do not revise the return of the year the rent related to.
- Claim the flat 30% deduction under sub-section (3) — it is available even though the property may no longer be owned.
- Report the amount under the house property head, not under income from other sources, even after a sale.
- Where the recovery comes through a decree, keep the decree and the receipt to evidence the year of realisation.
Common mistakes
- Revising the earlier year's return when old rent is recovered. Section 23(1) taxes it in the year of receipt.
- Treating the recovery as other sources income because the property has been sold. Sub-section (2) keeps it in the house property head.
- Claiming interest or municipal taxes against this receipt. Only the 30% deduction in sub-section (3) is available.
- Missing the deduction entirely because the property no longer appears in the house property schedule.
This is an explanatory guide, not tax advice, and it does not reproduce the section in full. Read the bare text of the section before you rely on it, and check for later amendments, the Income-tax Rules made under the new Act, and CBDT circulars and notifications.