In a move aimed at easing the financial burden on accident victims and their families, the Centre has proposed to exempt motor accident compensation and the interest earned on it from income tax. The proposal was announced in Budget 2026 and will take effect on April 1, 2026, subject to parliamentary approval.
The exemption applies to amounts awarded by Motor Accidents Claims Tribunals (MACT) in cases involving death, permanent disability, or bodily injury. Notably, the government has also proposed to remove tax deducted at source (TDS) on such compensation and interest.
Until now, compensation itself was not taxed, but interest accrued during lengthy legal proceedings was treated as taxable income. Insurance companies deducted tax at source before releasing payments.
For many beneficiaries, widows, elderly parents, or injured survivors with no steady income, this created an additional burden. They were required to file income tax returns only to claim refunds, often months after receiving the money.
“People already dealing with trauma were being pulled into avoidable paperwork,” a tax expert said. “The law didn’t reflect the reality that this money is meant for survival, not profit.” By exempting both compensation and interest, the government has removed what officials described as an unintended hardship in the tax system.
The high number of road accidents in India results in many families losing their primary income sources. The only financial support that families receive from MACT compensation helps them cover both medical expenses and essential living costs.
The new proposal ensures families receive this support in full, without tax deductions. The removal of TDS also means faster access to funds, especially critical in the months immediately after an accident.
The exemption will take effect on April 1, 2026, alongside the 2026-27 assessment year, after Parliament passes the required amendments to the Income-tax Act.
The government has designed the proposal as a reform focused on citizens, simplifying compliance requirements and providing full financial support to accident victims without delay.