Budget 2026 removes TDS on motor accident claim interest. What does it mean for insured taxpayers?

• Budget 2026 exempts TDS on interest from Motor Accident Claims Tribunal awards
• Insured will now receive full interest amount without tax deductions
• Move expected to speed up accident claim settlements and reduce disputes

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The Budget 2026 has exempted any TDS (Tax Deducted at source) arising from the interest on the compensation awarded to the insured taxpayers by the Motor Accident Claims Tribunal, which was earlier viewed as 'income for other sources' under Section 194A.

Finance Minister Nirmala Sitharaman, while delivering her budget speech, said, “I propose that any interest awarded by the Motor Accident Claims Tribunal to a natural person will be exempt from income tax, and any TDS on this account will be done away with.”

Such a move comes at a time when motor vehicle accidents have become a concern. The government’s own record suggests that as many as 26,770 people died in road accidents on National Highways in the first six months of 2025.

Motor Accident Claims Tribunals (MACTs) are quasi-judicial bodies set up under the Motor Vehicles Act, 1988. The priority of these tribunals, established at every district, is to provide speedy compensation for motor accident-related injuries, as well as deaths and even property damages.

Earlier, the MACT-awarded compensation amount was subject to TDS at a rate of up to 10 percent on claim amounts exceeding Rs 50,000. Tax analysts view the move by the Centre to exempt TDS on the interest of the claim amount as restitutive rather than income-generating in nature.

“The taxability of MACT interest had led to inconsistent treatment, with authorities viewing it as ‘income from other sources’, despite its intrinsic compensatory character. This resulted in TDS deductions and avoidable litigation, particularly burdening accident victims and dependents who are often not regular taxpayers,” said Aditya Bhattacharya, Partner, King Stubb & Kasiva, Advocates and Attorneys.

How does it benefit the insured?

The move is expected to speed up accident-related claim settlements between the insurer and the insured, which were earlier delayed due to TDS-related procedures and snowballed into refund-related disputes.

“Earlier, insurers were required to deduct TDS on the interest portion, often leading to disputes and settlement delays. With the interest now fully tax-exempt, the amount awarded by the tribunal will be exactly what the claimant receives,” said Parimal Heda, Chief Investment Officer, Go Digit General Insurance.

He explains that if the tribunal awards Rs 10 lakh as compensation along with Rs 1 lakh as interest for delays, earlier the interest portion was taxable, reducing the amount that actually reached the victim’s family. With the interest now exempt from income tax, the family receives the full Rs 11 lakh.

Paras Pasricha, Head of Motor Insurance at Policybazaar, also agrees that the move will allow claimants to receive the full interest amount without deductions, creating a uniform framework for insurers and tax authorities.

Motor vehicle accident cover

Vehicle accident cover is often provided to the insured when availing of a car insurance policy. Vehicle owners must have at least a third-party car insurance cover under the Motor Vehicles Act, 1988. Driving without insurance is illegal and attracts penalties.

Most insurance companies provide motor vehicle accident cover for personal or private vehicles, as well as for commercial vehicles. Some policies avoid accidental coverage. However, it can be purchased as an add-on, with premiums typically starting from Rs 350-500 per month.

While the personal accident cover is extended only to the owner of a private vehicle, the third-party car insurance for commercial vehicles mandates coverage for the driver as well as passengers. There’s also an accidental death benefit, with a sum-insured amount extending up to Rs 15 lakh.

Plans vary as per car insurance policies— the extent of coverage depends on the policy type, add-ons chosen, and exclusions specified by the insurer in their policy wording.