Income tax laws can at times be difficult to comprehend, particularly when it comes to how different sorts of income are handled. Any income derived from real estate is subject to taxation under the heading Income from House Property. It will be subject to taxation in the hands of the property's owner legally. Unrealized rent is one of the notions that frequently causes confusion. We will define unrealized rent, give an example to clarify the idea, look at its taxability, and describe how to compute unrealized rent in this post. We'll also discuss the Gross Annual Value, which is an important factor in this situation.

What is Unrealized Rent?

Unrealized rent is the amount of rent that a landlord did not receive from a tenant during a given fiscal year or was unable to recoup from them. This circumstance often occurs when a tenant falls behind on their rent obligations, either completely or partially. Unrealized rent may have tax repercussions, particularly for landlords who figure their taxable income from rental income.

Example of Unrealized Rent

Let's look at an illustration: You own a house that you rent out to tenants for INR 20,000 per month. Your renter misses three months of rent throughout the course of the fiscal year. For that fiscal year, the unrealized rent would total INR 60,000 (3 months x INR 20,000 per month).

Is Unrealized Rent Taxable?

The way unrealized rent is taxed depends on the country's income tax regulations. Unrealized rent is not taxable in the year it is unrealized in many jurisdictions, including India. When it is eventually realized or received in the following year, though, it becomes taxable. This will be under the income from house property category as well.

How to Calculate Unrealized Rent?

Typically, adding up the rent that was not received during the fiscal year is how unrealized rent is calculated. Use the formula below:

Total rent amount (-) Actual rent received = Unrealised rent.

Gross Annual Value (GAV)

The Gross Annual Value (GAV) is a crucial factor in the context of income tax, particularly when determining income from real estate. The GAV of a property is the annual rental income that it could earn if it were rented at its full market value. According to the Income Tax Act, it is determined using the property's municipal valuation, fair rent, and standard rent.

Because unrealized rent is income that the landlord has not yet received during that fiscal year, it is not included in the Gross Annual Value (GAV).

Conclusion

For landlords and property owners, understanding the idea of unrealized rent is essential, particularly when working with income tax calculations. Unrealized rent is not taxed right away, but it can be in the future when it is received. Unrealized rent should be accurately recorded because it may affect your future tax obligations.