The Income Tax Act, 2025 - replacing the 1961 Act from 01 April 2026 - brought a century-old exemption to the edge of expiry. The disability pension tax exemption for armed forces personnel, rooted in a 1922 notification, was saved from lapsing only by an express provision in the Finance Bill, 2026 (Clause 108). But the rescue came with a narrower scope: the statutory exemption now applies only to personnel who were invalided out of service - not to those who retired on superannuation despite having a service-related disability.
This guide explains who qualifies, who does not, the transitional status while the matter is sub-judice, and how defence personnel should approach ITR filing.
What Changed and Why?
The exemption for disability pension of armed forces personnel has existed since Notification No. 878-F (Income Tax) dated 21 March 1922 under the Income-tax Act, 1922. When the Income-tax Act, 1961 replaced the 1922 Act, the exemption continued through the repeal and savings provisions.
With the enactment of the Income Tax Act, 2025, the 1961 Act is repealed from 01 April 2026. The savings provisions that kept the 1922 notification alive also ceased to operate. In the absence of an express provision in the new Act, the entire exemption would have lapsed - affecting all disability pension recipients.
The Finance Bill, 2026 (Clause 108) addressed this by inserting an express exemption in Schedule III of the IT Act 2025. However, the statutory language codifies a specific scope: the exemption is available only where the individual has been “invalided out of service” on account of a disability attributable to, or aggravated by, military, naval, or air force service.
For personnel who complete their full term and retire on superannuation despite having a service-related disability, the exemption is not available under the new provision. This is where the controversy lies - and why the matter is sub-judice.
Defence veterans filing income tax return filing must understand which category they fall into and how to report their pension correctly.
Key Terms You Should Know
- Invalided Out of Service: Discharge from armed forces service because the individual is found medically unfit to continue service due to a disability. Determined by an Invaliding Medical Board. This is the qualifying criterion for the tax exemption.
- Superannuation: Normal retirement after completing the prescribed term of service. Personnel who retire on superannuation with a disability do NOT qualify for the exemption under the new provision.
- Disability Element: The component of disability pension payable for the disability itself, calculated based on the percentage of disability assessed by the medical board.
- Service Element: The component of disability pension corresponding to the service rendered, similar to regular pension but payable as part of the disability pension package.
- Schedule III - IT Act 2025: The schedule listing income not to be included in total income. The Finance Bill 2026 inserts the disability pension exemption here (after serial number 38).
- Clause 108 - Finance Bill 2026: The amendment clause that adds the disability pension exemption to Schedule III of IT Act 2025.
- Release Medical Board (RMB): Medical board that assesses impairment of personnel before retirement. Determines disability percentage under GMO-2023 and ER-2023.
Who Is Affected by This Change?
- Personnel invalided out of the Indian Army, Navy, Air Force, or paramilitary forces due to service-related disability - CONTINUE to receive tax-exempt disability pension (both elements)
- Personnel who retired on superannuation (completed full service) with a service-related disability - may LOSE the exemption once the CBDT notifies the effective date
- Personnel who took premature retirement despite disability (not invalided) - may LOSE the exemption
- Family members receiving disability pension after the death of the service member - exemption status depends on how the original member was discharged
- Personnel currently receiving disability pension and filing ITR for salaried individuals - must verify their discharge category before claiming exemption
Government data (as of 31 January 2026): 1,47,263 personnel retired with disability. 89,598 personnel invalided out of service. The gap of approximately 57,665 represents superannuated or otherwise retired personnel with disability who may be affected.
Who Qualifies vs Who Does Not: Comparison Table
| Category | Discharge Type | Exemption Status | Estimated Count |
|---|---|---|---|
| Invalided out due to disability | Invaliding Medical Board discharge - unfit to continue | EXEMPT - both disability and service elements tax-free | 89,598 |
| Superannuated with disability | Normal retirement after full term - had disability during service | NOT EXEMPT under new provision (pending final notification) | ~57,665 |
| Premature retirement with disability | Voluntary premature retirement - not invalided | NOT EXEMPT under new provision | Included in above |
| Paramilitary forces - invalided out | Invaliding Medical Board discharge | EXEMPT - same as armed forces | Data not separately published |
Transitional status: Since the matter is sub-judice, the CBDT has not yet notified the effective date of the amended provision. Pending such notification, the entire disability pension (both elements) remains exempt for ALL recipients - including superannuated personnel. Veterans should monitor CBDT notifications closely.
How to Determine Your Exemption Status: Step-by-Step
- Check your discharge certificate. The certificate specifies whether you were “invalided out of service” or retired on “superannuation.” This is the single document that determines your exemption eligibility.
- Verify the medical board classification. If you were discharged by an Invaliding Medical Board (IMB), you qualify. If you were assessed by a Release Medical Board (RMB) at the time of normal retirement, you may not qualify.
- Confirm the disability attribution. The disability must be “attributable to or aggravated by” military, naval, or air force service. The medical board’s assessment under GMO-2023 and ER-2023 establishes this attribution.
- Check current CBDT notification status. The effective date has not yet been notified. Until it is, claim the full exemption on both disability and service elements as before.
- Report correctly in ITR. In ITR-1 or ITR-2, report disability pension under the Pension/Family Pension head. Claim exemption under Schedule III for the applicable portion. If in doubt, consult a CA.
- Keep documentation ready for assessment. Discharge certificate, medical board proceedings, disability percentage assessment, and pension payment order should be readily available.
Documents Needed for Claiming Disability Pension Exemption
- Discharge certificate showing “invalided out of service” classification
- Invaliding Medical Board proceedings with disability attribution
- Disability percentage assessment under GMO-2023 / ER-2023
- Pension Payment Order (PPO) showing disability element and service element breakup
- Form 16 (Form 130 under IT Rules 2026) from the pension disbursing authority
- CBDT notification (when issued) confirming the effective date of the amended provision
- Any court order if the matter has been individually litigated
- Annual pension statement from SPARSH portal or pay account office
Historical and Legal Context
| Period | Legal Basis | Scope of Exemption |
|---|---|---|
| 1922-1961 | Notification 878-F (IT) dated 21 March 1922 under IT Act 1922 | Disability pension for invalided-out personnel exempt. Broad interpretation over time. |
| 1961-2025 | Continued via repeal and savings provisions in IT Act 1961. No express provision - relied on 1922 notification. | Exemption extended in practice to many disability pension recipients. Subject to ongoing litigation. |
| From April 2026 | Express provision in Schedule III of IT Act 2025 via Finance Bill 2026 Clause 108. | Narrowed: Only invalided out of service. Not available for superannuation or otherwise. |
| Transitional period | CBDT to notify effective date. Matter sub-judice. | Pending notification: entire disability pension (both elements) exempt for ALL recipients. |
Common Mistakes to Avoid for Defence Personnel Filing ITR
Mistake 1: Assuming all disability pension is still automatically exempt. Once the CBDT notifies the effective date, only invalided-out personnel will qualify. Superannuated personnel with disability must prepare to report their pension as taxable income. Monitor CBDT notifications and consult our tax planning services for transition guidance.
Mistake 2: Not claiming the exemption during the transitional period. Until the CBDT notifies the effective date, the entire disability pension remains exempt for ALL recipients. Do not voluntarily pay tax on disability pension when the transitional provision protects you.
Mistake 3: Confusing disability element with service element. The exemption - for qualifying personnel - covers BOTH the disability element and the service element of the disability pension. Some veterans incorrectly claim exemption only on the disability element.
Mistake 4: Not retaining discharge certificate and medical board documents. In case of assessment or scrutiny, the AO will require documentary proof of being invalided out. The discharge certificate and Invaliding Medical Board proceedings are the primary evidence.
Mistake 5: Ignoring the sub-judice status. The matter is before the courts. Any judicial ruling could change the scope. Veterans should track the proceedings and be prepared to file revised returns if the outcome differs from the current provision.
Tax Impact: What Superannuated Disability Pensioners Should Plan For
If the CBDT notification is issued and the narrower scope takes effect, superannuated personnel receiving disability pension will need to pay income tax on the pension at applicable slab rates (under the old or new regime).
Under Section 87A, individuals with total income up to Rs 7 lakh (new regime) pay zero tax due to the rebate. Many disability pensioners with moderate pension amounts may still have no net tax liability.
Under standard deduction of Rs 75,000 (for pension income under the new regime), the taxable pension is reduced further.
For veterans filing income tax notice help related to disability pension claims, the transitional provision (pending notification) provides a strong defence until the effective date is declared.
Veterans with higher pension amounts should evaluate whether the old regime (with deductions under 80C, 80D, etc.) or the new regime (with higher exemption threshold) results in lower tax liability.
How This Connects with Supreme Court Rulings and Ongoing Litigation
The Supreme Court’s 2019 ruling upheld the compensatory nature of disability pension, recognising it as compensation for service-related injury rather than regular employment income. This judicial interpretation supported broader exemption coverage.
The government’s position (as stated in Lok Sabha replies) is that the Finance Bill 2026 provision “continues the pre-existing legal position” and does not introduce a new restriction. However, veterans’ organisations argue that the express limitation to invalided-out cases effectively narrows the scope from what was practised.
The sub-judice status has resulted in the CBDT deferring the effective date. Pending notification, the entire disability pension (both elements) remains exempt for all recipients. The eventual court outcome will determine whether superannuated personnel with disability retain the exemption.
Key Takeaways
The Finance Bill, 2026 (Clause 108) inserts an express disability pension exemption in Schedule III of the Income Tax Act, 2025, saving the century-old benefit from lapsing when the IT Act 1961 is repealed.
The statutory exemption now applies only to armed forces and paramilitary personnel who were invalided out of service due to a disability attributable to or aggravated by military service. It covers both the disability element and the service element.
Personnel who retired on superannuation or premature retirement with a service-related disability are not covered under the new express provision. This affects approximately 57,665 of the 1,47,263 personnel retired with disability.
The matter is sub-judice. The CBDT has not yet notified the effective date. Pending notification, the entire disability pension (both elements) remains exempt for ALL recipients. Veterans must monitor CBDT notifications.
Defence veterans should verify their discharge classification (invalided out vs superannuation), retain all medical board documentation, and consult a CA for ITR filing to ensure correct exemption claims during the transitional period.
Need Help with Defence Pension Tax Filing?
The transitional status and sub-judice nature of the disability pension exemption require careful ITR filing. Whether you were invalided out or superannuated with disability, correct reporting of pension income, exemption claims, and supporting documentation is essential to avoid notices and protect your position.
Explore our ITR filing for expert CA assistance with defence pension taxation, exemption claims, and compliance under the new IT Act 2025.
For queries, reach out at +91 945 945 6700 or WhatsApp us directly.
