Normally it takes several years for a person injured in an accident or for the legal heirs/Dependents of the deceased who had died in an accident to get compensation from the Insurance Companies which insured the vehicles that caused the accident through Motor Accident Claims Tribunal.
Though the compensation received is exempt, the interest paid for delayed settlement is taxable in the hands of the recipients. The claimants have already suffered a lot due the accident and had spent money due to hospitalisation in the case of injuries and in the case of deaths they would have suffered heavily due sudden loss of life of their near and dear and in some cases they would have lost their bread winner.
In many cases they would have even borrowed money for their expenses due to hospitalisation in addition to legal expenses and would have incurred expenditure in the form of interest also. The interest received is also a form of compensation for the sufferings and in such a situation to tax the same in the hands of the recipient in the year of receipt is in no way reasonable and to some extent it is inhuman also.
To collect tax from the sufferers on the interest and that too after a prolonged litigation should be stopped. Hence this interest should be exempt from tax. Now this interest is subject to TDS also if the same exceeds Rs. 50,000/- and in many cases since PAN is not obtained tax is deducted @ 20%. Naturally it is not claimed by the recipients.
In certain cases where the compensation is paid to more than one person and as such they receive the same jointly and while TDS made, the deduction is shown under one PAN and in such cases others are not able to get the benefit of credit for the TDS. Till such time the interest is exempted from Income Tax, the Government can think of at least releasing the interest from the clutches of TDS provisions.