Impact of New Tax Regime on Motor Accident Compensation Awards

With the increase in the basic exemption limit to ₹12 lakh under the new tax regime, many individuals who previously avoided filing income tax returns due to low or irregular income or to avoid tax liability, now find it beneficial — even strategic — to do so. The recent Union Budget's revision of income tax slabs has triggered more than just financial relief for low- and middle-income earners — it could significantly reshape how motor vehicle accident compensation is calculated for daily wage earners, gig workers, informal employees, and homemakers.

In India, compensation awarded under the Motor Vehicles Act majorly depends upon the income of the deceased (claimant- in case of injury), age and dependency. Since the compensation is calculated based on loss of income after the accident, it increases as the income rises. If valid proof of income is provided, the compensation is determined based on the actual income. In the absence of such proof, compensation is calculated according to the minimum wages notified by the respective state.

Courts typically treat Income Tax Return as the primary proof of income in motor vehicle accident cases. In National Insurance Co. Ltd. v. Pranay Sethi 2017 INSC 1068, the Supreme Court laid down structured guidelines for computation of compensation, clearly prioritizing actual income proof over notional figures. With a growing number of people filing them, compensation awarded is expected to become fairer and potentially higher.

India's unorganised sector, which accounts for nearly 90% of the total workforce, has traditionally remained outside the scope of direct taxation because of low or unrecorded incomes. In Kirti v. Oriental Insurance Co. Ltd. 2021 INSC 6, the Supreme Court recognized that homemakers perform measurable economic functions, and compensation must reflect that contribution. Further, the homemakers often run small-scale businesses from home that offer flexibility and require minimal capital like tuition, tiffin services, stitching, etc. Also in rural households, the women are engaged in the farming. Hence, if this large workforce starts filing Income tax return, it will certainly impact the compensation calculation in the accident cases.

The significance of filing an Income Tax Return (ITR) becomes evident by an example. Imagine a 24-year-old man who tragically loses his life in a motor accident in January 2023, leaving behind his wife and mother. He was employed as a mechanic in Rajasthan. In the absence of documentary evidence proving his income and occupation, the Motor Accident Claims Tribunal (MACT) would rely on the Minimum Wages Notification issued by the Rajasthan government to determine his income. For the year 2023, the minimum wage for unskilled labour was ₹7,410. Now, imagine if a person files ITR of Rs. 10,00,000/- for a year as per the new enhanced tax slab. Based on this, the loss of income would be calculated as follows:

There is a difference of Rs. 1,54,00,000/- in the above case by filing of the ITR (even without any tax liability). So, we can conclude that if more people filing their ITR, even less than the threshold limit of Rs. 12 lakhs, it will severely impact the amount of compensation.

Judicial decisions have consistently highlighted the significance of documentary evidence in determining compensation amounts. Such documents may include salary certificates from employers, business balance sheets, and bank statements. However, income tax returns are given the highest weight by the courts. For individuals in the organised sector, especially government employees, income calculation is rarely disputed, as their earnings are well-documented and typically supported by ITRs. The dispute generally arises in case of people belonging to unorganised sector where income is irregular and may be given in cash. In this scenario, ITR plays a very important role. Numerous judgments have reiterated that ITRs, being statutory documents, provide a reliable foundation for the determination of annual income.

Recently, the Supreme Court in New India Assurance Co. Ltd. v. Sonigra Juhi Uttamchand, 2025 INSC 15, while determining the income of the deceased therein had observed:

“8. ….Monthly income could be fixed taking into account the tax returns only if the details of payment of tax are appropriately brought into evidence so as to enable the Tribunal/Court to calculate the income in accordance with law.”

In the interesting case of United India Insurance Co. Ltd. v. Indiro Devi & Ors. 2018 INSC 575, the deceased was working in the Food Corporation of India. He filed ITR which was higher than the salary received by him. The Supreme Court upheld the income as per the ITR for calculating compensation even if was different from the salary certificate. More recently, in the case of S.Vishnu Ganga vs M/S Oriental Insurance Company Ltd, 2025 INSC 123, the Supreme Court observed:

“ It is no longer res integra that Income Tax Returns are reliable evidence to assess the income of a deceased”

The insurance companies always take the plea that the income shall not be calculated only on the basis of the ITR filed and there must be some other document to substantiate the income. The companies request to produce salary certificate, bank statements, joining letter of the service, balance sheet of the business etc. to co-relate the income with the ITR filed. However, it is very difficult in the court to disregard the income based on ITR. In the case of Smt. Anjali & Ors. V. Lokendra Rathod & Ors. 2022 INSC 1285 the deceased used to run a business of scrap and in support the appellants had filed the deceased's Income Tax Return for financial year 2009-2010 before the Tribunal which showed the total income of deceased to be Rs.1,18,261/-, approx. Rs.9855/- per month. The MACT disregarded the deceased's Income Tax Return on the ground that neither any ITR prior to 2009-2010 nor any other document with regard to the deceased's income was filed before the Tribunal. The Supreme Court held that the Tribunal committed grave error while estimating the deceased's income by disregarding the Income Tax Return of the Deceased and then calculated the income on the basis of the ITR filed.

While the Supreme Court has consistently upheld the use of Income Tax Returns (ITRs) as credible evidence for determining income in motor accident compensation cases, there are instances where the Court has emphasized the necessity of additional corroborative evidence to substantiate income claims. Although, it is difficult to disregard the ITR, the insurance companies shall put forth the submissions more effectively with documentary evidences if there are drastic differences between the ITR and the actual income. There shall be thorough investigation of the income sources of the deceased/claimants and verification of the ITR through the department.

In conclusion, the evolving judicial stance clearly establishes Income Tax Returns as a reliable and legally endorsed basis for assessing income in motor accident compensation cases. These developments underscore the necessity of maintaining accurate and consistent financial records, as such documentation can profoundly influence the quantum. With the introduction of the enhanced income tax slab, not only are the legal implications far-reaching, but it also serves as an incentive for more individuals to file their ITRs. This, in turn, ensures that compensation awards reflect the quantum based on documentary proofs rather than using minimum wages or notional income. The higher quantum of compensation will certainly impact the underwriting process of the insurance companies.

Authors:

Hafiz Gouran is an Assistant Manager (Law) at Oriental Insurance Co. Ltd. &. Noureen Khan is an Advocate at Rajasthan High Court.

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