Finance Bill had proposed taxing disability pension except for personnel invalided out due to service-related disabilities

The exemption from paying income tax on disability pension granted to Armed Forces personnel continues to be in forces, the Ministry of Defence had told the Parliament’s Standing Committee on Defence. 

The  Finance Bill, 2026 had proposed to bring disability pension under the tax ambit except in cases where an individual has been invalided out of service due to a physical disability attributable to or aggravated by  military service. This had drawn an adverse reaction from the service community.

“Although, the matter of taxation comes under jurisdiction of Ministry of Finance, however, the Committee would like to recommend that since the Ministry of Defence is one of the stake-holder in the matter, the Ministry may take this important issue up to an appropriate level to examine the proposal of bringing disability pension under the ambit of Income Tax,” the Committee had recommended in an earlier report.

In its report of August 8, the Committee, however, expressed concern over the amendments involving exemption of income tax on disability pension and asked the Defence Ministry to take up this matter with the Ministry of Finance at the appropriate level so that financial concerns of the ex-servicemen, particularly the disabled personnel, are duly addressed in an upright manner.

Disability pension is paid to members of the Armed Forces who suffer medical or physical impairment that is attributable to or aggravated by military service. It consists of service element, that is, pension for the length of service rendered and the disability element, that is, compensation for injury or disease. Income Tax exemption on disability pension was first introduced in 1922.