Section 25 of Income Tax Act – The Hidden Clause on Property Income You Might Miss

When dealing with taxation on property income, most taxpayers focus on deductions available under Sections 23 and 24. However, Section 25 of the Income Tax Act is equally important as it tells you what amounts are not deductible from income from house property. This ensures that only eligible expenses are reduced from taxable income, preventing inflated claims.

Section 25 also introduces a special provision for cases where unrealised rent allowed as deduction is realised subsequently, ensuring fairness in taxation. Whether you are an individual landlord, a business owner with rental properties, or a Section 25 company (not-for-profit), understanding these provisions is critical to avoid penalties & disputes.

What is Section 25 of Income Tax Act?

Section 25 specifies that certain amounts cannot be deducted when calculating taxable income under the head “Income from House Property.” This applies to all taxpayers, including individuals, HUFs, companies, and trusts.

The key phrase here is "Amounts not deductible from income from house property", meaning that even if you have incurred such expenses, you cannot reduce them from your taxable rental income. The provision exists to ensure that the tax base is not eroded by claims that do not directly relate to the earning of property income.

Amounts Not Deductible from Income from House Property

Under Section 25, the following are amounts not deductible:

1. Any interest chargeable under the Act payable outside India on which tax has not been deducted at source (TDS) or paid.
2. Any other amount chargeable under the Act that is payable outside India without TDS compliance.
3. Expenses that are personal in nature or unrelated to the earning of rental income.

For example, if you take a loan from a foreign lender for property repairs but fail to deduct TDS on the interest paid, you cannot claim that interest as a deduction.

Special Provision – Unrealised Rent Later Realised

A common issue for landlords is unrealised rent – rent that was due but could not be collected from the tenant. Often, such amounts are allowed as a deduction in earlier years. But what if the tenant pays later?

Section 25 addresses this through special provision for cases where unrealised rent allowed as deduction is realised subsequently.

• If you recover such rent in a later year, it will be taxed in the year of receipt.
• This is done irrespective of whether you still own the property.

For instance, if you had a tenant who defaulted in FY 2021–22 & you claimed deduction for unrealised rent, but in FY 2024–25 you recover the amount, that recovered amount becomes taxable in FY 2024–25 under Section 25A/25AA.

Also Read: A Deep Dive into Charitable and Religious Income Exemptions

Section 25A & Section 25AA – Detailed View

Section 25A and Section 25AA extend Section 25’s principle to different situations:

• Section 25A: Applies when the property was let out and unrealised rent was deducted in earlier years but is recovered later.
• Section 25AA: Deals with arrears of rent that were not charged earlier but are received later.

In both cases, the recovered amount is taxable in the year of receipt after allowing a 30% standard deduction under Section 25B."

Section 25 of Income Tax Act Example

Let’s understand with a simple example:

• FY 2022–23: You own a rental property with monthly rent of ₹25,000. One tenant defaulted for 4 months, so you had ₹1,00,000 as unrealised rent. You claimed deduction for this amount in that year.
• FY 2024–25: The same tenant paid the ₹1,00,000 arrears. As per Section 25A, you will add ₹1,00,000 to your rental income for FY 2024–25 & pay tax accordingly.

Relation with Section 24 (Deductions)

While Section 24 allows deductions like 30% of net annual value and interest on borrowed capital, Section 25 ensures that ineligible amounts are filtered out. For taxpayers, it’s important to correctly distinguish between deductible and non-deductible expenses to avoid notices and penalties.

Section 25AA of Income Tax Act – Quick Facts

• Introduced to tax arrears of rent received without having to reopen past years’ assessments.
• Allows a 30% deduction from such arrears to account for repairs and maintenance.
• Applies to both residential and commercial properties.

Income Tax Exemption for Section 25 Company

A Section 25 company (under the Companies Act, now Section 8 company) is a not-for-profit entity. While Section 25 of the Income Tax Act deals with property income deductions, the term “Section 25 company” often causes confusion. These companies can get income tax exemption under Sections 11 and 12 if they qualify as charitable or religious institutions.

However, if such a company earns rental income, Section 25 rules on amounts not deductible will still apply unless specific exemptions are available.

Also Read: House Property = Tax Liability? Understand Before You File

Practical Tips for Taxpayers

1. Maintain Documentation – Keep proper agreements, rent receipts, & TDS records to support your claims.
2. Check TDS Compliance – Non-compliance can lead to disallowance of interest payments as per Section 25.
3. Disclose Arrears Properly – Use the correct ITR schedule for reporting unrealised rent recovered.
4. Plan in Advance – If you expect large arrears, plan for the tax impact in that year.

Common Mistakes to Avoid

• Claiming amounts not deductible from income from house property assuming they qualify under Section 24.
• Forgetting to declare recovered rent in later years.
• Confusing Section 25 of Income Tax Act with Section 25 company provisions under corporate law."

Conclusion

Section 25 of the Income Tax Act plays a crucial role in ensuring that only legitimate deductions are claimed against income from house property. It also ensures fairness by taxing unrealised rent when recovered, even in later years, through its special provision for cases where unrealised rent allowed as deduction is realised subsequently.

Whether you are an individual landlord, a corporate property owner, or a Section 25 company, understanding this section can help you stay compliant & avoid legal trouble.

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