Delivering her ninth consecutive Budget, Union Finance Minister Nirmala Sitharaman announced the abolishment of Tax Deducted at Source (TDS) on interest awarded by the Motor Accident Claims Tribunal (MACT) to a natural person. This comes as a huge respite to victims of road accidents and could lead to significant savings on compensation amounts for victims, who depend on this money for medical treatment and livelihood support. Here's a quick explainer to simplify what the latest proposal means and why it is important to you.
Interest On Motor Accident Claims Tribunal Compensation:
If a person gets injured or passes away due to a road accident, in such a case, the MACT may award them compensation along with an interest amount awarded from the date
of the claim petition, as such compensation can take years to be received by the victims. Up till now, the accumulated interest of over Rs 50,000 in motor accident compensation cases was being taxed at a 10 percent TDS rate. The finance minister has now announced that no tax will be levied on such compensation and interest anymore.
"Any interest awarded by the Motor Accident Claims Tribunal to a natural person will be exempt from income tax and any TDS on the account will be done away with." Sitharaman said on February 1, 2026.
Use-Case Illustration:
For perspective, let's say that a 30-year-old man named Rahul got injured in a road accident in 2019 and filed a claim for compensation with the Motor Accident Claims Tribunal. Later in 2026, the MACT awarded him a compensation of Rs 8 lakh along with an interest amount of Rs 2 lakh for the delay of 7 years.
Based on the pre-budget guidelines, the insurance company that would make the compensation and interest payout to Rahul would deduct Rs 20,000 as TDS from the interest amount of Rs 2 lakh (Interest payout drops to Rs 1.80 lakh) and if Rahul wants to get back the deducted tax, he would either have to file an income tax return or claim refund that would take months or even years. Assuming Rahul is poor or does not file ITR, there is no way for him to claim this amount.
Post the 2026-27 budget change, once the compensation and interest are awarded to Rahul by the MACT, he receives the full amount with no TDS paid on interest. This means he receives the full Rs 8 lakh compensation and Rs 2 lakh in interest, making up for a total of Rs 10 lakh in payout.
This benefits road accident victims who need money urgently for medical treatment, long-term care, or livelihood. With many road accident victims being non-taxpayers, this led to the TDS getting stuck under unclaimed refunds.
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Backdrop Behind The Budget Proposal:
The rejigged compensation proposal comes after the Supreme Court had asked the Centre and the Income Tax Department, in 2024, to clarify whether TDS should apply on interest accumulated above Rs 50,000 in motor accident compensation cases. The Bombay High Court had later held that interest awarded from the date of petitioning is not taxable as it is part of the compensation and not income.
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