Finance Minister Nirmala Sitharaman proposed exempting interest on motor accident compensation from income tax, removing TDS obligations. The Budget move ensures MACT-awarded interest to individuals remains tax-free, offering relief to accident victims and simplifying compliance under the Income-tax Act.
NEW DELHI: Union Finance Minister Nirmala Sitharaman, In her recent Budget speech, proposed an exemption for interest accrued on motor accident compensation from the Income-tax Act, which would eliminate the requirement for tax deducted at source (TDS) on interest awarded in motor accident claims.
Sitharaman stated,
“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,”
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The Proposal:
The proposal specifically addresses interest payments linked to compensation awarded by MACTs. Currently, this interest is often considered taxable income, prompting insurers or authorities to deduct TDS before disbursing the funds. Claimants typically have to apply for refunds later if their income stays below the taxable limit.
With the proposed modification, interest awarded by MACTs will be exempt from income tax, thus removing the need for TDS and the subsequent refund process.
Paras Pasricha said,
“The Budget proposal to exempt interest on motor accident compensation from income tax and remove TDS largely settles the issue in favour of claimants for future cases, as tax authorities and insurers will be bound to follow the amended law once enacted,”
Reactions of Insurers:
Insurance companies have expressed that this change will have a practical impact on accident victims and their families.
Parthanil Ghosh, Executive Director, HDFC ERGO General Insurance commented,
“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,”
Ashwani Dhanawat, Executive Director and Chief Investment Officer, Shriram General Insurance, added,
“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.”
Impacts on Claimants:
Pasricha noted that the change will significantly affect how claimants receive their compensation. The expected impacts include:
- Claimants will receive the full interest amount upfront without any TDS deduction.
- There will be an immediate improvement in cash flow at the time of payment.
- There will be no need to file income tax returns merely to claim TDS refunds.
Legal experts indicated that eliminating TDS will directly enhance liquidity for claimants, many of whom wait years for compensation.
Dinkar Sharma, Company Secretary and Partner, Jotwani Associates said,
“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,”
He noted,
“This is especially crucial for families confronting urgent medical expenses or trying to regain stability after a life-altering event. Compensation is intended to provide timely financial support, not get stuck in procedural delays,”
Jay Parmar, Co-founder and Partner, Aurtus, remarked that the immediate advantage would be higher cash payouts for future claimants.
Parmar stated,
“Previously, victims lost 10–20 percent of their interest due to TDS deductions under the Income-tax Act. With this removal, they can finally receive the total amount that is rightfully theirs,”
He added,
“For families that have waited years for compensation, particularly those from lower-income backgrounds, this significantly enhances liquidity while reducing paperwork,”
Parmar cautioned that the amendment is set to take effect prospectively, meaning its implications will only apply to actions and causes arising after the law is enacted. Current and ongoing litigation on the matter is anticipated to remain largely unaffected.
The issue of TDS on MACT interest has been under scrutiny for several years. In 2024, the Supreme Court sought input from the Union government and the Income Tax Department regarding whether TDS is applicable to interest exceeding Rs 50,000 awarded in motor accident claims.
In 2022, the court had directed the Centre to investigate amounts deducted as TDS from MACT awards that remained unclaimed, especially for claimants who fall outside the income tax net.
Additionally, the Bombay High Court in the case of Rupesh Rashmikant Shah v. Union of India held that interest awarded in motor accident claims from the date of filing until the award or appeal is made is not taxable, as it does not constitute income.
Sharma clarified that the Budget announcement does not, by itself, alter the law.
He explained,
“No substantive change occurs until Parliament enacts the amendment through the Finance Act and brings it into force,”
He concluded,
“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 further stated that disputes relating to prior years would remain governed by the existing legal framework, with claimants depending on the outcomes of ongoing litigation, including any decisions from the Supreme Court.