Union Finance Minister Nirmala Sitharaman announced a major relief for road accident victims and their families in the Union Budget 2026-27. The government has declared that any interest earned on compensation awarded by the Motor Accident Claim Tribunal (MACT) will now be completely free from income tax. This decision removes the burden of paying tax on the delayed payment of compensation, ensuring that the full amount reaches the affected individuals.
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What is the new rule regarding TDS?
According to the announcement made on February 1, 2026, insurance companies will no longer deduct Tax Deducted at Source (TDS) on interest payments made to victims. Previously, under Section 194A of the Income Tax Act, if the interest amount exceeded Rs 50,000, companies had to deduct 10% TDS. This forced many people to file Income Tax Returns just to claim a refund. Now, for any natural person receiving this compensation, the entire process is tax-free and hassle-free.
When will the new policy start?
This humanitarian step is expected to be effective from April 1, 2026, under the proposed new Income Tax Act. The decision also settles long-standing legal confusion, as various High Courts previously had conflicting verdicts on whether this interest should be treated as taxable income. With this clear legislative update, the government aims to support accident victims without adding procedural complications.
