Supreme Court Clarifies Computation of Motor Accident Compensation: All Salary Components Must Be Included

Supreme Court Clarifies Computation of Motor Accident Compensation: All Salary Components Must Be Included

Case: Manorma Sinha & Anr. v. The Divisional Manager, Oriental Insurance Co. Ltd. & Anr.
Citation: 2025 Supreme (SC) 1818; 2025 INSC 1237
Date of Judgment: 15 October 2025
Bench: Supreme Court of India
📄 Full Judgment: Read on Indian Kanoon

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Introduction

The Supreme Court of India has once again reaffirmed that “just compensation” under the Motor Vehicles Act, 1988 must be determined based on the real income of the deceased, not a restricted or notional computation. In Manorma Sinha & Anr. v. The Divisional Manager, Oriental Insurance Co. Ltd. & Anr., the Court clarified that all components of salary, including allowances and benefits, must be considered when computing compensation under Sections 168 and 173 of the Act.

The judgment strengthens the rights of claimants and ensures that insurance companies cannot undervalue claims by excluding legitimate components of the deceased’s remuneration on technical grounds such as “taxable” or “non-taxable” income.

Background of the Case

The claimants, Manorma Sinha and another, sought compensation for the death of their family member, who was in permanent employment at the time of the fatal accident. While granting compensation, the Motor Accident Claims Tribunal (MACT) and the High Court excluded certain allowances and benefits from the deceased’s income and calculated compensation solely on the basic pay.

Aggrieved by this limited computation, the claimants approached the Supreme Court, asserting that all components of the deceased’s gross income, including allowances and non-cash benefits, must be considered to ensure a fair and just award.

Key Legal Issues

1.      Should allowances and benefits, beyond the basic salary, be included in determining compensation under Sections 168 and 173 of the Motor Vehicles Act, 1988?

2.     Does the taxability of income components affect computation of “just compensation”?

3.     What is the correct rule for applying future prospects and the multiplier in calculating loss of dependency?

Supreme Court’s Findings

1. All Salary Components to Be Included

The Supreme Court held that all components of salary — including allowances, incentives, and benefits — form part of the deceased’s actual income and must be considered while calculating compensation.

“Just compensation must reflect the true economic loss suffered by dependents. Artificial exclusions of genuine income components defeat the social purpose of the Motor Vehicles Act.”

The Court referred to earlier precedents such as National Insurance Co. Ltd. v. Indira Srivastava (2008) 2 SCC 763 and Santosh Devi v. National Insurance Co. Ltd. (2012) 6 SCC 421, which emphasized that the real income includes benefits that support dependents.

2. Taxability Is Irrelevant

The Court categorically rejected the argument that non-taxable components should be excluded. The object of compensation is not income taxation but equitable restitution.
Hence, gross income — not post-tax income — forms the base for computing loss of dependency.

3. Future Prospects to Be Added

Following National Insurance Co. Ltd. v. Pranay Sethi (2017) 16 SCC 680, the Court reaffirmed that for a deceased below 40 years of age in permanent employment, 50% addition towards future prospects must be made. This reflects the likely career progression and ensures that compensation mirrors real-life earning potential.

Computation Formula and Rule Explained

To standardize compensation under Section 168, the Court reiterated the Sarla Verma formula (from Sarla Verma & Ors. v. DTC, 2009) as the guiding principle.

The computation of loss of dependency should follow this formula:

Annual Income × (1 + Future Prospects%) × (1 – Personal Expense Deduction%) × Multiplier = Loss of Dependency

Step-by-Step Application:

1.      Determine Gross Annual Income:
Include basic salary + all allowances and benefits.

2.     Add Future Prospects:

o   Below 40 years: +50%

o   40–50 years: +30%

o   50–60 years: +15%

3.     Deduct Personal Expenses:
As per Sarla Verma:

o   Married (2–3 dependents): 1/3rd deduction

o   4–6 dependents: 1/4th deduction

o   Bachelor (parents as dependents): 1/2 deduction

4.     Apply Multiplier:
Based on the age of the deceased (not dependents):

Age of Deceased	Multiplier
Up to 25 years	18
26–30 years	17
31–35 years	16
36–40 years	15
41–45 years	14
46–50 years	13
51–55 years	11
56–60 years	9
61–65 years	7
Above 65 years	5

5.     Add Conventional Heads:
Following Pranay Sethi, fixed amounts are to be added for:

o   Loss of consortium: ₹40,000

o   Loss of estate: ₹15,000

o   Funeral expenses: ₹15,000
(These amounts are to be periodically updated with inflation.)

 

Illustrative Example

If the deceased earned ₹60,000 per month (₹7,20,000 per year) including allowances:

·       Future Prospects (+50%): ₹3,60,000

·       Total Income: ₹10,80,000

·       Less 1/3rd personal expenses: ₹7,20,000

·       Apply multiplier (age 35 → 16): ₹7,20,000 × 16 = ₹1,15,20,000

·       Add conventional heads: ₹70,000
Total Compensation: ₹1,15,90,000

This demonstrates how inclusion of allowances and proper application of multiplier and future prospects ensures fair and realistic compensation.

 

Significance of the Judgment

This ruling strengthens the humanitarian and social welfare intent of the Motor Vehicles Act, 1988. It ensures that:

·       Claimants receive compensation that truly reflects their loss.

·       Insurers cannot reduce payouts by excluding genuine income components.

·       Courts follow uniform computation standards across India.

It also reinforces that the Act must be interpreted liberally and purposefully, keeping in mind its objective of providing social justice to accident victims and their families.

Conclusion

The decision in Manorma Sinha v. Oriental Insurance Co. Ltd. reiterates that compensation under the Motor Vehicles Act must be comprehensive, equitable, and realistic. By confirming that all components of salary should be included and the Sarla Verma–Pranay Sethi formula must guide computation, the Supreme Court ensures consistency, transparency, and justice in motor accident claim adjudication.

This ruling will serve as a vital reference for claimants, legal practitioners, and tribunals in ensuring that no rightful component of a victim’s income is ignored in the quest for just compensation.

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