Interest On Motor Accident Claims Exempted : Budget 2026

Interest On Motor Accident Claims Exempted: Budget 2026 Under the Ease of Living initiatives of the Budget 2026-2027, the government has proposed a si

Interest On Motor Accident Claims Exempted: Budget 2026

The Union Budget 2026–27 has introduced a significant humanitarian reform aimed at protecting motor accident victims and their families by amending the tax treatment of compensation awards. This change is part of the transition to the Income Tax Act, 2025, which is scheduled to take effect from 1 April 2026.

Detailed Provisions of the Exemption

• Full Tax Exemption on Interest: Under the new proposals, any interest awarded by the Motor Accident Claims Tribunal (MACT) to a natural person (an individual) is completely exempt from income tax.
• Removal of TDS: The requirement for Tax Deducted at Source (TDS) on such interest has been entirely removed. This applies irrespective of the total amount of interest awarded, meaning insurance companies will no longer withhold a portion of the payment for tax purposes.
• Principal vs Interest: Tax law distinguishes between the principal compensation (awarded for death, permanent disability, or bodily injury) and the interest (awarded for delays in receiving justice),. While the principal has always been a tax-exempt capital receipt, the interest was previously taxable at the recipient's slab rate if it exceeded ₹50,000. Budget 2026 eliminates this tax burden on the interest component.
• Eligible Recipients: This benefit is specifically available to individual victims and their legal heirs. However, non-individual entities, such as trusts or companies, do not qualify for this exemption and must continue to follow the old tax and TDS provisions.

Humanitarian and Administrative Impact

The sources indicate that the government made this change to align the tax system with the humanitarian intent of accident compensation laws. Previously, the taxation and TDS on interest created significant hardship for families already facing emotional and financial trauma. By removing these hurdles, victims now receive the full benefit of the award upfront, eliminating the need to wait months or years to claim tax refunds through the return-filing process.

Example

To understand the practical shift, consider the following scenario based on the new rules starting in the 2026-27 tax year:

The Scenario: A victim is awarded a MACT compensation package consisting of:

1. Principal Amount: ₹15,00,000 (for bodily injury).
2. Interest Component: ₹4,00,000 (awarded due to a five-year delay in court proceedings).

Comparison of Tax Treatment:

Component	Treatment Before Budget 2026	Treatment After Budget 2026
Principal (₹15 Lakh)	Always tax-exempt.	Always tax-exempt.
Interest (₹4 Lakh)	Taxable because it exceeds ₹50,000. The insurance company would deduct TDS, and the victim would pay tax on the rest at their slab rate.	Fully tax-exempt; the recipient retains 100% of the interest.
TDS on Interest	Applicable (usually 10%).	Not applicable at all.
Final Payout	The victim receives less than the full amount immediately and must file a tax return to potentially claim a refund.	The victim receives the entire ₹19,00,000 upfront without any deductions or procedural hurdles.