Clause 108 of the Finance Bill, 2026 proposes an important relief for victims of motor accidents and their families by amending Schedule III of the Income-tax Act, 2025.
The amendment provides a specific income-tax exemption for interest awarded on compensation granted under the Motor Vehicles Act, 1988. This change addresses long-standing hardship faced by accident victims who were required to pay tax on interest received as part of compensation for personal injury or death.
Background: Taxability of Interest on Motor Accident Compensation
Under the existing legal framework:
- Compensation awarded by Motor Accident Claims Tribunals (MACT) for death or bodily injury has generally been treated as capital receipt, not taxable.
- However, interest awarded on such compensation was often treated as taxable income under the head “Income from Other Sources”.
- This led to:
- tax deductions at source (TDS),
- reassessment disputes, and
- significant litigation, despite the compensatory nature of such interest.
Courts have delivered varying decisions on this issue, resulting in lack of uniformity and certainty.
What Clause 108 Proposes
Clause 108 seeks to amend Schedule III of the Income-tax Act, 2025, which lists incomes not to be included in total income. Under the proposed amendment:
✔ Any interest awarded on compensation under the Motor Vehicles Act, 1988
✔ received by an individual or his legal heir
✔ shall be fully exempt from income tax
This exemption applies regardless of:
- whether the compensation relates to death or bodily injury, and
- whether the interest is awarded by a Tribunal or Court.
Scope of the Exemption
The exemption covers:
- Interest awarded on compensation determined under:
- Motor Accident Claims Tribunal (MACT), or
- appellate court orders under the Motor Vehicles Act, 1988.
- Interest received by:
- the injured individual, or
- legal heirs of a deceased victim.
The relief applies only to interest component linked to motor accident compensation and not to unrelated interest income.
Legislative Intent
The key objectives behind this amendment are:
- to recognise that interest on motor accident compensation is compensatory and restorative, not income-generating,
- to eliminate tax hardship for accident victims and families already facing trauma and financial stress,
- to align the tax law with principles of equity and social justice, and
- to reduce avoidable litigation and administrative burden.
Practical Implications for Taxpayers
- No income-tax liability on interest received along with MACT compensation
- Reduced TDS disputes and refund claims
- Simplified compliance for accident victims and legal heirs
- Greater certainty during scrutiny and assessment proceedings
Effective Date
- Applicable from: 1 April 2026
- Relevant for: Tax Year 2026-27 and subsequent years
Conclusion
The amendment proposed under Clause 108 of the Finance Bill, 2026 brings much-needed clarity and relief by exempting interest on motor accident compensation from income tax.
By recognising the compensatory nature of such interest, the law moves towards a more humane and taxpayer-friendly approach, ensuring that victims and their families receive the full benefit of compensation awarded to them.
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