In this guide
What changed from Tax Year 2026-27?
Interest awarded by a Motor Accidents Claims Tribunal (MACT) on compensation under the Motor Vehicles Act, 1988, is exempt from income tax for an individual or the individual’s legal heir from Tax Year 2026-27. The exemption applies from 1 April 2026.
The Income-tax Act, 2025 also removes the TDS requirement on this interest when it is credited or paid to an individual. The amount does not matter: the individual exemption is not limited to ₹50,000.
This is a specific relief for MACT interest. It does not mean that every amount described as “compensation” or “interest” is tax-free. The tribunal award and payment records should clearly show that the interest was awarded under the Motor Vehicles Act.
What is a Tax Year?
Under the Income-tax Act, 2025, the tax year is the 12-month period beginning on 1 April. Tax Year 2026-27 runs from 1 April 2026 to 31 March 2027.
The 2025 Act applies from 1 April 2026. For income received in an earlier period, apply the law and return framework for that period. Do not use the Tax Year 2026-27 exemption to change the tax treatment of an amount already received in a previous year.
Who can claim the exemption?
The exemption covers interest on compensation awarded by a MACT under the Motor Vehicles Act, 1988, when received by:
- An individual claimant; or
- The individual’s legal heir.
It can apply whether the tribunal award relates to death, bodily injury or permanent disability, provided the payment is interest on compensation awarded under the Motor Vehicles Act and the recipient meets the eligible-person condition.
The exemption is not based on the claimant’s income level, tax regime or the amount of interest. For example, an individual receiving ₹1.8 lakh of qualifying MACT interest in Tax Year 2026-27 does not include that interest as taxable income merely because it exceeds ₹50,000.
Which part of the award is exempt?
Keep the different components of a claim separate. A MACT payment may include compensation, interest, costs or other amounts. The new exemption specifically covers interest on compensation awarded by the tribunal. Do not assume that every payment connected with a motor accident has the same tax treatment.
Check the award, insurer’s payment statement and bank credit advice. If the documents show a combined amount, ask the insurer or tribunal office for a breakup between principal compensation, interest and other components.
| Payment component | Practical treatment |
|---|---|
| Interest awarded by MACT under the Motor Vehicles Act and received by an individual or legal heir in Tax Year 2026-27 or later | Exempt under the new provision |
| MACT interest received by an individual in a tax year before 2026-27 | Apply the law for the year of receipt; it was generally taxable, subject to the applicable deduction |
| MACT interest received by a person other than an individual | The individual exemption does not apply; check taxability and TDS separately |
| Interest from a civil decree, delayed business payment or another statute | Do not treat it as MACT interest; apply the rules for that type of interest |
| Principal compensation or litigation costs | Review the award and the relevant rules for that component; this article’s exemption concerns interest |
How was MACT interest taxed before Tax Year 2026-27?
For earlier years, interest on compensation or enhanced compensation was generally taxable in the year it was received. Under the Income-tax Act, 1961, it was treated as income from other sources, and a deduction equal to 50% of the qualifying interest was generally available under section 57(iv). The old law also provided that the interest was taxed in the year of receipt.
For example, if an individual received ₹1,00,000 of qualifying MACT interest during FY 2025-26, the older rules generally taxed ₹50,000 after the 50% deduction, with the amount included in the return for AY 2026-27. The actual tax depended on the person’s overall income and applicable rates.
That treatment should not be carried forward to qualifying MACT interest received by an individual in Tax Year 2026-27. The new exemption applies to that tax year and later tax years. Do not report the interest as taxable “Income from Other Sources” and then claim a 50% deduction for the same exempt amount.
If the payment was received before 1 April 2026 but the tribunal award was made earlier or later, the receipt date and applicable year matter. Keep documents showing when the interest was paid or credited and get advice on any unusual split payment or dispute about the receipt date.
TDS rules for Tax Year 2026-27
Section 393 of the Income-tax Act, 2025 contains the TDS rules for interest and other payments. Its amended provision states that TDS is not required on interest awarded by a MACT when the recipient is an individual. This applies even if the interest is more than ₹50,000.
The former ₹50,000 threshold remains relevant for a recipient who is not an individual. For such a recipient, TDS may apply when the aggregate qualifying interest exceeds ₹50,000 during the tax year. The individual exemption should not be assumed to cover a company, firm or other non-individual claimant.
| Recipient | MACT interest received in Tax Year 2026-27 | TDS position |
|---|---|---|
| Individual or individual’s legal heir | Any amount | No TDS under the amended rule |
| Person other than an individual | Aggregate interest up to ₹50,000 | The specified no-TDS threshold applies |
| Person other than an individual | Aggregate interest above ₹50,000 | TDS may apply; confirm the payer’s calculation and applicable rate |
TDS and final tax liability are separate questions. TDS is tax withheld by the payer and reported against a recipient’s tax records. For qualifying interest received by an individual in Tax Year 2026-27, the income-tax exemption applies even if a payer mistakenly withholds tax. A deduction on a tax statement does not by itself make exempt income taxable.
If tax is deducted incorrectly, first contact the insurer or other payer and provide the MACT award and proof that the recipient is an individual or legal heir. Check the tax credit statement and AIS after the payer files its TDS statement. If the credit appears there, the recipient may need to claim it through the applicable return or follow the available correction or refund process. Do not claim a credit that is not reflected in official tax records without checking how the payer reported it.
How to report the exempt interest in your ITR
The exemption does not automatically remove all return-filing obligations. A person may still need to file because of other taxable income or another applicable filing condition.
For Tax Year 2026-27, use the ITR form and e-filing utility prescribed for that tax year when they become available. If the applicable return asks for exempt income, report the MACT interest in the exempt-income schedule or field, such as Schedule EI where applicable. Do not enter it as taxable interest under “Income from Other Sources” or claim the old 50% deduction against it.
A practical filing process is:
- Identify when the interest was received. Record the payment or credit date, not just the date of the accident or tribunal order.
- Separate interest from other components. Use the tribunal award and payment breakup.
- Confirm the recipient. Keep proof that the amount was paid to the individual claimant or legal heir.
- Check tax records. Review Form 26AS, AIS and the relevant TDS certificate if tax was deducted.
- Complete the applicable return schedule. Use the exempt-income field in the notified form if required, and verify that the amount has not also been treated as taxable income.
- Keep supporting records. Retain the award, insurer’s computation, bank statement and any correspondence about TDS.
TaxClear’s ITR filing guide for AY 2026-27 explains the general online filing process. The form for Tax Year 2026-27 will follow the tax-year framework, so check the applicable utility rather than relying on an older form’s labels.
The reporting approach is similar to other exempt-income disclosures, but do not confuse this relief with agricultural income or another exemption. TaxClear’s guide to agricultural income and Schedule EI covers a different category of income.
Records to keep
Keep the records together, even if no tax is due on the interest. They can help establish the exemption, correct a TDS error or answer a later query.
- MACT order or award showing the compensation and interest
- Insurer’s calculation and payment advice, with a component-wise breakup
- Bank statement showing the credit date and amount
- Documents establishing legal-heir status, where relevant
- TDS certificate and tax-credit statement if tax was withheld
- Any correspondence with the insurer, tribunal office or tax department
Avoid relying only on a bank narration such as “claim settlement.” It may not identify which part is interest or the law under which it was awarded.
Common mistakes to avoid
- Assuming the ₹50,000 limit still applies to individuals. From Tax Year 2026-27, no TDS is required on qualifying MACT interest paid or credited to an individual, regardless of amount.
- Assuming all compensation-related interest is exempt. The exemption is tied to interest awarded by a MACT under the Motor Vehicles Act and to the eligible recipient.
- Applying the 50% deduction to exempt interest. That deduction may matter for taxable interest in earlier years or other qualifying situations. It is not a way to report exempt MACT interest as taxable income in Tax Year 2026-27.
- Using the accident date as the tax year. The payment or credit timing and the applicable law determine the relevant tax year.
- Ignoring a TDS mismatch. Check whether the deduction appears in Form 26AS or AIS and request a correction from the payer if needed.
- Treating exemption as automatic relief from filing a return. Other income and filing conditions may still require an ITR.
FAQs
Is MACT interest taxable in Tax Year 2026-27?
Qualifying interest on compensation awarded by a MACT under the Motor Vehicles Act is exempt when received by an individual or the individual’s legal heir in Tax Year 2026-27 or later.
Is there a ₹50,000 limit for an individual?
No. The ₹50,000 threshold is not a ceiling on the individual exemption or the individual’s TDS relief from Tax Year 2026-27. It continues to matter for the specified TDS treatment of recipients who are not individuals.
Does the exemption apply to a legal heir?
Yes, where the legal heir receives qualifying interest awarded under the Motor Vehicles Act. Keep documents showing the award, payment and legal-heir status.
What if the insurer deducted TDS anyway?
Ask the payer to review the deduction and correct its TDS reporting if appropriate. Then check Form 26AS and AIS. If the tax credit is reported, follow the applicable return or correction process; do not assume the withholding changes the taxability of exempt interest.
How was the interest taxed before 1 April 2026?
For earlier years, qualifying interest was generally taxable in the year received, with a 50% deduction under the previous Act’s section 57(iv), subject to the rules applicable to that year.
Do I still need to file an ITR if this is my only receipt?
The exemption does not by itself settle whether a return is required. Consider your other income and any applicable filing conditions, and use the return form prescribed for the relevant tax year.
