In a move aimed at easing the financial burden on accident victims, Union finance minister Nirmala Sitharaman, in her Budget 2026 speech, proposed a complete tax exemption on motor accident compensation as well as on the interest awarded for delays in the payment of such compensation.
Starting April 1, 2026, any compensation and interest awarded by the Motor Accidents Claims Tribunals (MACT) to an individual or their legal heirs, whether due to death, permanent disability, or bodily injury, will be entirely exempt from income tax.
Earlier, the principal compensation amount was treated as a capital receipt, effectively making the interest earned on it taxable.
The proposed amendment to Sections 11 and 56 of the Income Tax Act, 2025, changes this by exempting compensation and interest income in its entirety. This ensures that the full value of the tribunal’s award reaches the beneficiary without being lowered by tax liabilities.
The proposal is set to take effect from April 1 and will apply to the Tax Year 2026-27 and all subsequent years.
A welcome move
By removing the tax liability, the government has moved to ensure that legal compensation reaches and supports the aggrieved families, said Pankaj Mathpal, founder and managing director, Optima Money Managers.
“It did not make sense because it’s a claim of loss. It’s not an income. Since it’s compensation, basically on which TDS (Tax Deducted at Source) was applicable, they have removed it,” he said.
Arnav Pandaya, founder of Moneyeduschool, explained that the compensation received under the Motor Vehicles Act from a tribunal will not be considered your income. “There’ll be no tax on that interest part. So, the full amount will go to them. What used to happen was that if there was a TDS, then if the claim is ₹1 lakh and the TDS was there, so you only got the net figure, but now the full amount will come and the interest received,” he said.
Pandaya also explained that for anyone who receives this kind of compensation, the interest component is usually due because the compensation is received after a period of time.
“There is an actual compensation part, plus there is an interest component also, because it takes time. There’s usually a delay. Since this becomes tax-free, it is good for you. Earlier, the interest part was also taxable,” he added.
“The impact is positive for the insurer or their family. This is the aggrieved family that got justice, and that justice was delayed. Interest applies when something does not reach you on a designated date. It gives relief to the insured person and their family,” echoed Amol Joshi, founder of PlanRupee Investment Services.