Finance Minister Nirmala Sitharaman has announced a significant relief for road accident victims in the Union Budget 2026-27. The government has decided that any interest received on compensation awarded by the Motor Accident Claims Tribunal (MACT) will now be completely tax-free. This move aims to help victims and their families receive the full financial support without worrying about tax deductions.
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What are the changes in the new tax rule?
Under the new proposal, interest paid to any natural person on accident compensation will not be treated as taxable income. Previously, insurance companies used to deduct TDS if the interest amount exceeded a certain limit. With this change, no Tax Deducted at Source (TDS) will be cut from the interest payments made by insurance companies or the tribunal.
This rule is expected to come into effect from April 1, 2026, under the proposed Income Tax Act. Earlier, under Section 194A, a 10% TDS was deducted if the interest amount was more than Rs 50,000 in a year. Victims often had to file income tax returns just to claim a refund of this deducted amount. The new rule removes this hassle entirely.
Why was this decision taken?
This decision is seen as a humanitarian step to support families suffering from the loss or injury of a member in road accidents. The Ministry of Finance clarified that the legal process for compensation often takes time, leading to interest accumulation. Taxing this interest was reducing the actual financial help meant for the victims.
- Legal Clarity: This announcement settles long-standing confusion in courts regarding the taxability of such interest.
- Full Support: Families will now get the entire amount without any cuts.
- No Paperwork: Beneficiaries will not need to file tax returns specifically for this income.
