New Delhi, Feb 1: In a major relief measure for road accident victims and their families, Union Finance Minister Nirmala Sitharaman on Sunday announced that interest earned on motor accident compensation claims will be fully exempt from income tax. The proposal was unveiled during the presentation of the Union Budget for 2026-27 in Parliament.
As part of the measure, Tax Deducted at Source (TDS) on such interest payments will also be abolished, ensuring that beneficiaries receive the entire amount awarded to them without any tax-related deductions. The move is aimed at strengthening the compensatory and humanitarian intent behind motor accident claims.
Under existing provisions of the Income Tax Act, the interest component awarded by Motor Accident Claims Tribunals (MACT) is treated as taxable income. Given the prolonged delays often involved in settlement of claims, the interest portion can be substantial. This has resulted in victims or their dependents losing a significant share of compensation to taxes or being forced into complex refund procedures, thereby weakening financial support meant for medical treatment, rehabilitation and livelihood restoration.
Clarifying the scope of the relief, Sitharaman said the exemption would apply specifically to interest awarded to a “natural person”, recognising the personal and welfare-oriented nature of these claims. “Any interest awarded by the Motor Accident Claims Tribunal to a natural person will be exempt from income tax, and any TDS on this account will be done away with,” she said in her Budget speech.
The exemption is expected to come into effect from the financial year 2026-27, offering immediate relief in both ongoing and future cases.
India continues to face a significant road safety challenge, with thousands of fatalities and injuries reported every year. Compensation cases often involve long legal battles, with interest intended to offset delays and hardship. By removing the tax burden, the government aims to make awards more meaningful and victim-centric.
The announcement has been welcomed by legal experts, victim advocacy groups and insurance stakeholders, who view it as a long-overdue correction that prevents erosion of compensation meant for recovery and rehabilitation. The move also aligns with the Budget’s broader focus on simplifying tax compliance and providing targeted relief, even as it pushes infrastructure, manufacturing and fiscal consolidation.
