Budget 2026: Accident victims to get full claim amt without tax deductions

Union Budget 2026 on compensation: The change, once enacted, will ensure accident victims receive the full interest awarded on compensation without tax deductions

Budget 2026: Union Finance Minister Nirmala Sitharaman, in her Budget speech on Sunday, announced a proposal to exempt interest accrued on motor accident compensation from the Income-tax Act. Once enacted, the change will remove tax deducted at source (TDS) on the interest component awarded in motor accident claims.

 

“Any interest awarded by the Motor Accident Claims Tribunal (MACT) to a natural person will be exempt from income tax and any TDS on the account will be done away with,” Sitharaman said.

 

What the proposal changes

 

The proposal covers interest paid on compensation awarded by MACTs. At present, this interest is often treated as taxable income, with insurers or authorities deducting TDS before releasing the amount. Claimants then have to seek refunds if their income falls below the taxable threshold.

 

 

With the proposed amendment, interest awarded by MACTs will no longer attract income tax, removing the need for TDS and the refund process that followed.

 

Response from insurers

 

Insurance companies said the change would make a practical difference for accident victims and their families.

 

“The exemption of interest on Motor Accident Claims Tribunal awards from income tax and TDS is a significant step towards building a citizen-centric insurance ecosystem, encouraging wider adoption of motor cover and ensuring that accident victims receive full financial support when they need it most,” said Parthanil Ghosh, Executive Director, HDFC ERGO General Insurance.

 

“The compassionate exemption of TDS on Motor Accident Claims Tribunal interest awards stands out as a victim-friendly relief, ensuring faster, untaxed access to compensation for those in distress,” said Ashwani Dhanawat, Executive Director and Chief Investment Officer, Shriram General Insurance.

 

Impact on claimants

 

Legal experts said the removal of TDS would directly improve liquidity for claimants, many of whom wait years for compensation.

 

“With the new exemption, accident victims and their families receive their full compensation without any tax deduction at source and without the delays linked to the refund process,” said Dinkar Sharma, Company Secretary and Partner, Jotwani Associates.

 

“This is especially important for families facing urgent medical expenses or trying to regain stability after a life-altering event. Compensation is meant to provide timely financial support, not get stuck in procedural delays,” he said.

 

Jay Parmar, Co-founder and Partner, Aurtus, said the immediate benefit would be higher cash receipts for future claimants.

 

“Earlier, victims were losing 10–20 per cent of their interest amount due to TDS deductions under the Income-tax Act. With this deduction removed, they finally receive the full amount that is rightfully theirs,” Parmar said.

 

“For families who have waited years for compensation, particularly those from lower-income backgrounds, this improves liquidity and reduces paperwork,” he added.

 

Prospective effect and pending cases

 

Parmar cautioned that the amendment has been introduced with prospective effect.

 

“Its implications apply only to actions and causes arising after the date of enforcement. Current and ongoing litigation on the issue is expected to remain largely unaffected,” he said.

 

The question of TDS on MACT interest has been under judicial scrutiny for several years. In 2024, the Supreme Court sought the views of the Union government and the Income Tax Department on whether TDS applies to interest over and above Rs 50,000 awarded as compensation in motor accident claims.

 

In 2022, the court had asked the Centre to examine amounts deducted as TDS from MACT awards that were lying as unclaimed refunds, particularly in cases where claimants did not fall within the income tax net.

 

The Bombay High Court, in Rupesh Rashmikant Shah v. Union of India, had held that interest awarded in motor accident claims from the date of filing the claim petition till the passing of the award or appeal was not taxable, as it did not constitute income.

 

When the change takes effect

 

Sharma said the Budget announcement does not by itself alter the law.

 

“No substantive change occurs until Parliament enacts the amendment through the Finance Act and brings it into force,” he said.

 

“Once the amendment becomes law, the position is clear. Interest on compensation awarded under MACT will no longer be subject to tax, and there will be no basis for deducting TDS on awards made after the amendment’s commencement,” he added.

 

He also said disputes relating to earlier years would continue under the previous legal framework, with claimants relying on the outcome of pending litigation, including any decision of the Supreme Court.