Budget 2026: FM Proposes Full Tax Exemption for Disability Pension of Armed Forces Personnel Invalided Out of Service [Read Finance Bill 2026]
Budget 2026 proposes full income-tax exemption on disability pension for Armed Forces personnel invalided out of service due to service-related injuries
The Union Budget for the Financial Year 2026-27 was presented by Finance Minister Nirmala Sitharaman in the Lok Sabha today (Sunday, 1 February 2026).
The Finance Minister has proposed granting a full income-tax exemption for disability pension received by members of the Armed Forces, including paramilitary personnel, who are invalided out of service due to bodily disability attributable to, or aggravated by, military, naval or air force service.
As per the proposal in the Finance Bill, 2026, the tax exemption will cover both the service element and the disability element of the pension. However, the benefit will be available only in cases where the individual has been invalided out of service on account of a service-related disability, and will not apply to personnel who retire on superannuation or otherwise.
The proposed amendment seeks to provide clarity and uniformity in the tax treatment of disability pensions, recognising the unique nature of injuries and disabilities sustained during active service. At present, the tax treatment of disability pensions has been subject to varying interpretations, leading to litigation and uncertainty for affected personnel.
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“It is proposed to amend the Table in the said Schedule so as to provide an express statutory exemption in respect of disability pension, including both the service element and the disability element, in cases where an individual has been invalided out of service on account of such disability attributable to, or aggravated by, such service. However, the said exemption shall not be available where the individual has retired from service on superannuation or otherwise.”
The move is aimed at ensuring equitable tax relief for Armed Forces and paramilitary personnel who suffer service-related disabilities and are forced to exit service prematurely. The proposal aligns with the government’s broader objective of welfare support and financial security for defence personnel and their families.
The proposed exemption will take effect from 1 April 2026 and will apply to the tax year 2026–27 and subsequent years.
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