New Delhi, Feb 1 In a major relief initiative for victims of road accidents and their families, Union Finance Minister Nirmala Sitharaman announced during the presentation of the Union Budget for 2026-27 on Sunday that the interest accrued on motor accident compensation claims will be fully exempt from income tax.
This proposal, aimed at ensuring victims receive the complete amount without deductions, also eliminates Tax Deducted at Source (TDS) on such interest payments.
The announcement came as part of broader tax relief initiatives in the budget, presented in Parliament for the ninth consecutive time by FM Sitharaman.
Under current provisions, interest components awarded by Motor Accident Claims Tribunals (MACT) -- often substantial due to delays in claim settlements -- are treated as taxable income under the Income Tax Act. This has resulted in victims or their dependents losing a portion of the compensation to tax liabilities, sometimes forcing them to navigate complex refund processes or face reduced financial support for medical care, rehabilitation, and livelihood restoration.
The Finance Minister emphasised that the exemption applies specifically to interest awarded to a “natural person” (individual claimants), recognising the compensatory and humanitarian nature of these awards.
"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," FM Sitharaman said in her budget speech.
This change is expected to take effect for the financial year 2026-27, providing immediate relief in ongoing and future cases.
Road accidents remain a major public health and economic challenge in India, with thousands of fatalities and injuries annually leading to prolonged legal battles for compensation.
The delays in tribunal awards often inflate the interest component, intended to compensate for the time value of money and suffering endured.
This move has been welcomed by legal experts, victim rights groups, and insurance stakeholders, who argue it addresses a long-standing inequity.
It prevents erosion of awards meant for rehabilitation and could encourage faster claim resolutions.
The proposal forms part of FM Sitharaman's focus on simplifying compliance and providing targeted relief amid sustained economic reforms, even as the budget prioritises manufacturing, infrastructure, and fiscal consolidation with a projected capex hike to Rs 12.2 lakh crore.
The full exemption is poised to benefit lakhs of affected families, ensuring that justice in motor accident cases is not diminished by fiscal deductions.
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