The Draft Income-tax Rules, 2026 set out new draft conditions for claiming deductions for unrealised rent and a standard method for calculating aggregate average advances for each rural branch of scheduled banks.
Rule 21 in the draft text defines “unrealised rent” and links any deduction to Section 21(4), while Rule 22 prescribes a month-by-month computation method tied to Section 31(1) of the Income-tax Act.
Both rules focus on proof and process: Rule 21 places the burden on a property owner to show rent is “lost and irrecoverable,” and Rule 22 standardises how scheduled banks compute rural branch advances for tax purposes.
The draft package, described as the Draft Income-tax Rules, 2026, singles out Rule 21 (Unrealised Rent) and Rule 22 (Rural Branch Advances) as operative provisions for these two areas.
Wednesday’s focus for taxpayers and banks is how the Draft Income-tax Rules translate broad statutory references into compliance steps, especially where the text explicitly requires the taxpayer to satisfy an Assessing Officer.
Property owners looking at unrealised rent provisions face an all-conditions test, not a partial checklist, because the draft says the deduction under Section 21(4) applies “only when all of the following conditions are met.”
Scheduled banks, meanwhile, must take a monthly snapshot approach to rural branch advances, because the rule hinges on outstanding amounts “at the end of the last day of each month” within the tax year.
Rule 21 starts with a definition that narrows what counts as unrealised rent for tax purposes. It describes unrealised rent as rent receivable but not paid by a tenant that the owner cannot realise and that “must be proved as lost and irrecoverable.”[1]
That definition, combined with the explicit reference to Section 21(4), frames unrealised rent less as a general hardship concept and more as a fact pattern that must be evidenced and proven within the Draft Income-tax Rules.
The draft then sets out an eligibility gateway: a property owner can claim a deduction for unrealised rent under Section 21(4) only when every listed requirement is satisfied.[1]
One consequence of that structure is that a taxpayer’s claim does not turn on a single factor, such as non-payment alone. The rule’s wording instead makes the deduction contingent on tenancy legitimacy, tenant status, and recovery efforts taken or addressed.
The first condition is bona fide tenancy. The draft describes this as a legitimate tenancy, and it points to documentation when it says the arrangement is typically evidenced by “a signed and registered rental agreement.”[1]
By anchoring the requirement in the idea of legitimacy, the rule directs attention to how the tenancy can be demonstrated, not simply asserted, when a claim for unrealised rent is presented.
The second condition moves from paperwork to possession. It requires that the defaulting tenant has vacated the property, or that the owner has taken steps to compel the tenant to vacate.[1]
That condition ties the unrealised rent deduction to an end of occupation, or at least to demonstrable action to end occupation, rather than allowing the claim to rest solely on unpaid amounts.
The third condition addresses a potential conflict that goes beyond the specific property in default. It requires that the defaulting tenant is not in occupation of any other property owned by the assessee.[1]
In practical terms, the draft’s language forces a cross-property check by the owner, because a tenant’s occupation elsewhere in the owner’s holdings would block the deduction under Rule 21.
The fourth condition turns on recovery action and the role of the Assessing Officer. The assessee must have taken “all reasonable steps to institute legal proceedings for recovery of the unpaid rent,” or must be able to satisfy the Assessing Officer that legal proceedings would be futile.[1]
That provision sets a two-track route: either litigation steps are taken and can be shown, or futility must be demonstrated to the Assessing Officer as a substitute for filing.
Beyond listing the conditions, the draft states where responsibility sits. It puts the burden of proof on the property owner to establish that the rent is lost and irrecoverable, while also demonstrating the legitimacy of the tenancy and the genuine efforts made to recover the amount.
The burden language matters because it links the definition of unrealised rent to an evidentiary obligation, rather than treating “unrealised” as a label that automatically flows from non-payment.
For property owners, the internal logic of Rule 21 reads as a sequence: show a bona fide tenancy, show that the tenant has left or that steps were taken to remove the tenant, confirm the tenant does not occupy another property of the assessee, and show legal recovery steps or satisfy the Assessing Officer that legal proceedings would be futile.
The draft’s explicit reference to a “signed and registered rental agreement” as typical evidence highlights the role of documents in meeting the first condition, and it signals what an owner may need at assessment time to establish bona fide tenancy.
Similarly, the tenant-vacation requirement pushes an owner to maintain a record of whether the tenant has vacated or, if not, what steps were taken to compel vacation, because the condition is framed in terms of status or action.
The “no other property occupation” condition is framed in absolute terms. It does not describe exceptions in the provided draft text, and it treats the tenant’s occupation of any other property owned by the assessee as disqualifying.
The legal recovery condition is equally framed around reasonableness and satisfaction of the Assessing Officer. The owner must either show “all reasonable steps” to institute proceedings or show futility to the Assessing Officer, making the assessment-facing narrative and evidence central to the claim.
Taken together, those requirements make the unrealised rent deduction under Section 21(4) in the Draft Income-tax Rules a high-documentation claim that depends on a complete fact pattern, rather than an isolated invoice-by-invoice write-off.
Rule 22, by contrast, addresses a different constituency and a different compliance challenge. It prescribes the methodology for calculating aggregate average advances made by rural branches of scheduled banks under Section 31(1) of the Income-tax Act.[1]
The draft positions Rule 22 as a standardised calculation. It aims to ensure consistent computation across rural branches of scheduled banks by specifying what to count, when to count it, and how to average it.
The first step in the calculation process is monthly aggregation. The draft requires that “the amounts of advances made by each rural branch as outstanding at the end of the last day of each month comprised in the tax year shall be aggregated separately.”[1]
That sentence fixes the measurement point at month-end and requires separate aggregation for each rural branch, rather than a single blended figure collected without branch-level separation.
The second step is average computation. Under the draft, “the sum arrived at for each branch shall be divided by the number of months for which the outstanding advances have been taken into account.”[1]
The structure is mechanical: determine the monthly outstanding amounts, add them up for the months counted, then divide by the number of months used to reach the aggregate average advances figure for the tax year.
Rule 22’s branch-specific approach can place pressure on the integrity of month-end data. The methodology depends on accuracy at each month’s last day, because that is the snapshot the draft uses for outstanding advances.
The requirement that advances be aggregated “separately” for each rural branch underscores that the rural branch is the unit of computation under the rule, not merely a geographic label applied after the fact.
Because the draft ties the method to Section 31(1), it also signals that the computation is not an optional internal metric. It is presented as the prescribed approach for tax purposes under the Draft Income-tax Rules, 2026.
In practice, the Rule 22 method demands a repeatable monthly routine: capture each rural branch’s outstanding advances on the last day of each month in the tax year, sum those month-end figures for the months included, and divide by the count of those months.
The month-count denominator is specified as “the number of months for which the outstanding advances have been taken into account,” which links the average to the months actually included in the aggregation rather than assuming a fixed count without regard to inclusion.
Across both rules, the draft text leans heavily on record-keeping. Rule 21 explicitly requires proof that rent is “lost and irrecoverable,” and Rule 22 implicitly requires traceable month-end outstanding advance figures for each rural branch.
Documentation sits at the centre of unrealised rent claims because the conditions include both formal evidence of tenancy and an evidentiary burden to show recovery efforts or futility for legal proceedings.
The draft’s mention of the Assessing Officer in the legal recovery condition makes that part of Rule 21 an assessment-driven standard, where the owner’s file must support either instituted proceedings or a case for why proceedings would be futile.
For scheduled banks, the Rule 22 approach can require disciplined monthly controls to ensure the same measurement point is used each month and that branch-level aggregation is performed consistently for every rural branch.
The standardisation objective is explicit in the draft’s framing. It describes the rule as ensuring a “standardized approach to determining the average advances for tax purposes,” aimed at consistent calculation across rural branches of scheduled banks.
Some compliance questions flow from the text’s own triggers. The unrealised rent rule uses terms such as “all reasonable steps” and “futile,” and it places the burden on the property owner, making the taxpayer’s evidence and the Assessing Officer’s evaluation central to the outcome.
Banks face a different kind of operational sensitivity. Because the Draft Income-tax Rules specify month-end outstanding advances as the core data point, misalignment in month-end capture or inconsistent branch classification could disrupt the intended standardised computation.
Both rules also show how the draft attempts to pin down areas that often generate disputes: whether a non-payment is truly irrecoverable, and how an average figure should be computed when branch-level monthly balances fluctuate.
In the references embedded in the draft text, Rule 21 is tied to Section 21(4) and Rule 22 is tied to Section 31(1) of the Income-tax Act, creating a direct bridge between statute and the detailed conditions and calculations in the Draft Income-tax Rules, 2026.
The extract of the draft text includes footnote markers shown as “[1]” alongside the definition and the listed conditions for unrealised rent, and alongside the Rule 22 methodology for rural branch average advances computations.
Income Tax Rules Draft Tighten Unrealised Rent Cases, Rural Branch Advances
The Draft Income-tax Rules, 2026, define strict conditions for claiming unrealised rent deductions and calculating bank advances. Property owners must meet a four-part test involving tenancy legitimacy and recovery efforts. Scheduled banks must adopt a monthly aggregation method for rural branch advances. These updates prioritize standardized reporting, documentation, and the satisfaction of Assessing Officers to prevent tax disputes and ensure consistent compliance.
