As per the Explanation to Sec. 23(1), unrealised rent if any, should be deducted from gross annual value of house property computed under Sec 23(1)(b) or Sec 23(1)(c). However, no deduction of unrealised rent should be made in case the gross annual value is calculated under Sec 23(1)(a).
Conditions for unrealised rent
The amount of rent which the owner cannot realise shall be equal to the amount of rent payable but not paid by a tenant of the assessee and so proved to be lost and irrevocable where-
(a) The tenancy is bona fide;
(b) The defaulting tenant has vacated, or steps have been taken to compel him to vacate the property;
(c) The defaulting tenant is not in occupation of any other property of the assessee;
(d) The assessee has taken all reasonable steps to institute legal proceedings for the recovery of the unpaid rent or satisfies the Assessing Officer that legal proceedings would be useless.