Taxability of interest on motor accident insurance compensation

Motor Accidents Claim Tribunal (MACT), which awards compensation to the victim or his family members is really meant to substitute the loss of potential income of the victim, and in most cases is in fact determined as a multiple of the victim’s income. Under tax laws, it is well settled that if a receipt is meant to substitute a source of income, it is a capital receipt. Capital receipts are generally not taxable as income, unless they are specifically roped in into the definition of income. As such compensations is not specifically included, they are therefore not taxable. This view has been confirmed by the High Courts of Allahabad, Himachal Pradesh and Madras in recent years.

These High Courts have also taken a view that interest on such motor accident compensation is not taxable as income. The mere fact that TDS may be deducted does not mean that the interest is taxable.

But the irony is that.... there is no clear directive from CBDT over the issue.