Allowances Must Be Included and Income Tax Deducted at Slab Rates in Motor Accident Compensation: Supreme Court in Manorma Sinha v. Oriental Insurance (2025)

Citation: 2025 INSC 1237 | Court: Supreme Court of India | Date: 15 October 2025

Bench: Manoj Misra, J. (author); Pamidighantam Sri Narasimha, J.

Introduction

This Supreme Court decision addresses recurring and practically significant questions in the computation of “just compensation” under the Motor Vehicles Act, 1988: whether salary allowances form part of the income for computing loss of dependency; how income tax should be deducted; the applicable rate for future prospects; and the conventional heads payable to the claimants.

The appellants, claimants before the Motor Accident Claims Tribunal (MACT), are the parents of a 27-year-old engineer employed with Power Grid Corporation of India (a public sector undertaking) who died in a 2011 motor accident. The Tribunal awarded Rs. 88,20,454 with interest. On appeal by the insurer, the Patna High Court reduced the award to Rs. 38,15,499 by excluding allowances, applying a flat 30% deduction towards income tax, and granting only 40% towards future prospects. The Supreme Court was called upon to decide whether the High Court’s reduction was legally justified.

Summary of the Judgment

• Allowances included: The Court held that allowances reflected in the salary slip (e.g., Dearness Allowance, local allowance, other allowances) must be included in the deceased’s income for calculating loss of dependency. Exclusion by the High Court was erroneous.
• Income tax deduction at slab rates: Deduction for income tax is permissible, but must be made strictly as per the applicable slab rates for the relevant year (here, 2011), not at an arbitrary flat percentage. In the absence of proof that any allowance was exempt, all components were treated as taxable for this purpose.
• Future prospects at 50%: For a permanent employee below 40 years in a public sector undertaking, future prospects must be added at 50%, not 40%.
• Multiplier and conventional heads: Multiplier of 17 (for age 27) is appropriate as per Sarla Verma. Conventional heads awarded were Rs. 15,000 (loss of estate), Rs. 40,000 (filial consortium), and Rs. 15,000 (funeral expenses), aligned with National Insurance Co. v. Pranay Sethi.
• Final award: Total compensation determined at Rs. 74,43,631 with interest at 6% per annum from the date of the claim petition till actual payment. The appeal was allowed by enhancing the High Court’s figure.

Computation Walkthrough (As Per the Supreme Court)

• Monthly salary (as per salary slip): Rs. 53,367 (Basic 26,420 + DA 11,360 + Local allowance 2,642 + Other allowances 12,945.80)
• Annual income: Rs. 53,367 × 12 ≈ Rs. 6,40,400
• Income tax (FY 2011):
  • Nil up to Rs. 1.60 lakh
  • 10% on Rs. 3.40 lakh = Rs. 34,000
  • 20% on Rs. 1.404 lakh ≈ Rs. 28,080
  • Total tax: ≈ Rs. 62,080
• Net annual income after tax: Rs. 6,40,400 − Rs. 62,080 = Rs. 5,78,324
• Personal/living expenses deduction (unmarried): 50% → Rs. 2,89,162
• Future prospects (50% of post-personal amount): Rs. 1,44,581
• Annual multiplicand: Rs. 2,89,162 + Rs. 1,44,581 = Rs. 4,33,743
• Multiplier: 17 → Rs. 4,33,743 × 17 = Rs. 73,73,631
• Conventional heads: Rs. 15,000 (estate) + Rs. 40,000 (filial consortium) + Rs. 15,000 (funeral) = Rs. 70,000
• Total compensation: Rs. 73,73,631 + Rs. 70,000 = Rs. 74,43,631
• Interest: 6% per annum from date of petition till payment

Detailed Analysis

Precedents Cited and Their Influence

• Sarla Verma & Ors. v. Delhi Transport Corporation & Ors., (2009) 6 SCC 121:
  • Prescribes the standard multiplier based on age; for age 27, multiplier is 17.
  • The Supreme Court affirmed the High Court’s correction of the Tribunal’s use of 18 to 17, aligning with Sarla Verma.
• National Insurance Co. Ltd. v. Pranay Sethi & Ors., (2017) 16 SCC 680:
  • Governs addition for future prospects and conventional heads.
  • For permanent employees under 40, future prospects are 50%. Conventional heads fixed at Rs. 15,000 (estate), Rs. 15,000 (funeral), and Rs. 40,000 (consortium).
  • The Court applied these principles to award 50% future prospects and moved from “love and affection” (impermissible post-Pranay Sethi) to “filial consortium” at Rs. 40,000.
• National Insurance Co. Ltd. v. Indira Srivastava & Ors., (2008) 2 SCC 763:
  • Explains that “income” for compensation is broader than take-home pay and includes benefits/perks enjoyed by the family.
  • Anchors the inclusion of allowances in the multiplicand.
• Vijay Kumar Rastogi v. UPSRTC, 2018 SCC OnLine SC 193:
  • Income should include benefits considered for income tax/professional tax, even if some components are later exempted by statute.
  • Strengthens the rationale for counting allowances as part of income.
• National Insurance Co. Ltd. v. Nalini & Ors., 2024 SCC OnLine SC 2252:
  • Reiterates that emoluments and benefits accruing to the deceased for the purposes of computing loss of income should be included irrespective of whether they are taxable.
  • The present judgment relies on this to reject the High Court’s exclusion of allowances.
• Ranjana Prakash & Ors. v. Divisional Manager & Anr., (2011) 14 SCC 639:
  • Confirms that deduction of income tax is permissible when computing compensation.
  • The Court uses this to hold that tax must be deducted, but crucially clarifies that it must be at the actual slab rates of the relevant year.
• Gestetner Duplicators (P) Ltd. v. CIT, West Bengal, (1979) 2 SCC 354:
  • Relied upon by the insurer to argue for exclusion of allowances. The Supreme Court effectively declines to apply this income-tax-centric lens to the Motor Vehicles Act context, emphasizing that for compensation, “income” has a broader connotation per Indira Srivastava/Rastogi/Nalini.

Legal Reasoning

• Inclusion of allowances in income:
  • The Court reiterates that compensation must reflect the real economic loss to dependants. In that assessment, “income” is not confined to the basic pay, and allowances that form part of the salary slip represent economic benefits flowing to the family.
  • Both Indira Srivastava and Rastogi hold that such benefits must be counted; Nalini clarifies inclusion irrespective of taxation status. Thus, the High Court’s approach of limiting the salary to only basic pay and DA was unsustainable.
• Deduction of income tax at correct slab rates:
  • While Ranjana Prakash permits deduction of income tax, the Court underscores that such deduction cannot be arbitrary. It must reflect the slab-wise rates applicable in the year of death (here, 2011).
  • Unless an allowance is proven to be exempt, it is included in the computation of taxable income. As the insurer did not establish the exempt character or nature of the allowances, the Court treated the entire salary (including allowances) as taxable for the limited purpose of determining net income.
  • This corrects the High Court’s flat 30% deduction and replaces it with a precise slab-wise calculation.
• Future prospects at 50% for a permanent PSU employee under 40:
  • Pranay Sethi prescribes addition of 50% for future prospects for permanent employees below 40 years. The deceased, an engineer in a PSU, had no material suggesting a non-permanent or fixed-term engagement.
  • The High Court’s 40% addition was thus erroneous; the Tribunal’s 50% is correct and restored.
• Multiplier and conventional heads:
  • In line with Sarla Verma, the multiplier for age 27 is 17. The Tribunal’s reliance on Schedule II to apply 18 was incorrect for a Section 166 claim, and the High Court rightly used 17; the Supreme Court affirms that.
  • For conventional heads, the Court awards Rs. 15,000 (loss of estate), Rs. 40,000 (filial consortium), and Rs. 15,000 (funeral), conforming to Pranay Sethi and moving away from the impermissible “loss of love and affection.”
• Sequencing of deductions and additions:
  • The Court calculated net income after tax, applied 50% deduction for personal expenses (being unmarried), and then added 50% for future prospects. Because both percentages are 50%, the order yields the same result as adding future prospects first and then deducting personal expenses. The key point is consistency with the governing percentages and clarity in computation.

Impact and Practical Significance

• Settles allowance inclusion: High Courts and Tribunals must include salary allowances reflected in the pay slip while determining the multiplicand. Attempts to confine income to basic pay and DA will be corrected.
• Slab-wise tax deduction is mandatory: The practice of shaving off a flat 30% for tax stands disapproved. Deduction must follow the actual slab rates applicable in the relevant year with annualized income computed from the last pay slip.
• Burden regarding exemptions: If a party contends any allowance is non-taxable/exempt, that party must prove it. In the absence of evidence disclosing the nature of the allowance and its exempt status, it will be treated as taxable for the limited purpose of net income computation.
• Future prospects reaffirmed: 50% addition for permanent employees under 40 in PSUs/government service is reaffirmed, protecting dependants from undervaluation based on conjecture about permanency.
• Conventional heads streamlined: Tribunals must avoid the discredited head of “loss of love and affection” and instead award consortium (including filial consortium) at Pranay Sethi rates, along with loss of estate and funeral expenses, unless escalation rules are specifically applied as per binding precedent.
• Overall effect: The decision curbs under-compensation due to mechanical or over-simplified methods (like flat tax rates or exclusion of allowances) and provides a transparent, replicable framework for computation nationwide.

Complex Concepts Simplified

• Multiplicand: The annual income of the deceased after necessary deductions (such as income tax and personal expenses) and additions (like future prospects). It represents the yearly financial support the dependants have lost.
• Multiplier: A factor based on the deceased’s age (from Sarla Verma) used to project the duration over which the dependants would have received support. For age 27, the multiplier is 17.
• Future prospects: An addition to current income to reflect likely increases over the deceased’s career. As per Pranay Sethi, permanent employees under 40 get a 50% addition.
• Personal/living expenses: The portion of income the deceased would have spent on themselves. For an unmarried person, courts typically deduct 50% before computing the dependants’ loss.
• Conventional heads: Standard, modest sums awarded for non-pecuniary losses, namely loss of estate, consortium (including spousal/parental/filial forms), and funeral expenses.
• Slab-wise income tax: Tax is calculated progressively: different segments of income are taxed at different rates. The Court requires using the specific slabs and rates applicable in the year of death, based on the annualized last-drawn income.
• Allowances/perks: Salary components beyond basic pay (e.g., Dearness Allowance, HRA, local/other allowances). For compensation purposes, these typically form part of “income” unless shown otherwise.

Why the High Court’s Approach Was Incorrect

• Excluding allowances: Contravenes Supreme Court authority that “income” encompasses salary benefits beyond basic pay. It understates true dependency loss.
• Flat 30% tax deduction: Not reflective of actual tax burden and legally unsound under Ranjana Prakash. It can materially depress compensation.
• Future prospects at 40%: Inconsistent with Pranay Sethi’s 50% for permanent employees under 40.
• Conventional heads: The High Court’s composite figure and method were misaligned with Pranay Sethi, which rejects “loss of love and affection” and fixes standard amounts.

Key Takeaways and Practice Notes

• Always produce the full, recent salary slip and, where available, Form 16 to help ascertain both gross salary and actual tax liability.
• If any allowance is claimed to be exempt, the party asserting exemption must adduce evidence of the nature and legal basis of exemption. Absent proof, allowances will count both for income assessment and for tax deduction.
• Apply slab-wise income tax rates of the financial year corresponding to the date of death/accident, not the date of award or appeal.
• For bachelors, deduct 50% towards personal/living expenses; for married decedents, follow Sarla Verma’s guidance (generally one-third, depending on dependants).
• Use the Sarla Verma multiplier corresponding to the deceased’s age and add future prospects in line with Pranay Sethi, based on employment nature and age.
• Under conventional heads, avoid disallowed categories like “loss of love and affection” and adhere to Pranay Sethi’s heads and amounts unless later binding directions require periodic enhancement.

Conclusion

The Supreme Court’s decision provides important clarifications in motor accident compensation law. It consolidates and operationalizes three pillars: (i) “income” for the purpose of loss of dependency includes the full bouquet of salary allowances; (ii) deduction towards income tax must be precise and slab-wise for the relevant year, not a blunt percentage; and (iii) future prospects must be added at 50% for permanent employees below 40, with the appropriate Sarla Verma multiplier and Pranay Sethi conventional heads.

By enhancing the award from the High Court’s figure to Rs. 74,43,631 with interest at 6% p.a., the Court ensures that dependants receive compensation that is both principled and realistic, while providing Tribunals and High Courts a clear computational roadmap to avoid under-compensation. The judgment will likely influence computation practices nationwide, curbing arbitrary deductions and underscoring the evidentiary onus when exclusions are claimed.