For more than a century now, a certain section of retired armed forces personnel has been entitled to tax-free disability pensions. The 2026 Union Budget, however, proposes to revoke this exemption for one category of such personnel — those who did not have to leave the forces owing to the disability and continued serving until superannuation.

The move has sparked opposition from affected veterans who describe it as “discriminatory and arbitrary”.

What is a disability pension, and who is entitled to it?

A disability pension is a financial benefit provided to armed forces personnel who have suffered or aggravated disabilities in the course of service. It typically comprises two parts — a service element, based on length of service, and a disability element, based on percentage of disability assessed by a medical board. This ensures higher compensation for more severe disabilities.

Since when has the disability pension been tax free?

Disability pensions for armed forces personnel have been fully exempt from income tax since 1922 (under the old Income Tax Act), a practice reaffirmed by a Central Board of Direct Taxes circular in 2001.

In 2019, the Income Tax Department issued a circular attempting to withdraw this exemption for those not “invalided out”. The Supreme Court, however, stayed this order in 2021, holding that a longstanding practice could not be overturned by a mere circular. The exemption, thus, continued.

How has the Union Budget sought to change this?

In the Union Budget presented on February 1, 2026, and via the Finance Bill 2026, the Union government is looking to amend the Income Tax Act to restrict the full tax exemption on disability pensions only “to personnel invalided out of service due to bodily disability attributable to or aggravated by military duty. Those who continue serving despite the disability and retire on superannuation (or take premature retirement) will lose this exemption, effective from April 1, 2026 (tax year 2026-27 onward)”.

In other words, if a soldier was boarded out due to disability, the tax exemption continues. If a soldier continued service despite disability and retired later on normal completion of service (superannuation), the exemption will no longer be applicable.

What do retired personnel say?

Col Gaurav Sharma (retd) from 14 Grenadiers, personally affected by the change, argues that it creates “an arbitrary, discriminatory distinction” within the same class of disabled personnel.

“Two individuals with identical service-attributable disabilities now face different tax treatment based solely on whether the organization invalided them out or allowed/required them to continue serving — a decision not in the individual’s control,” he says.

He contends that the move violates Article 14 (equality before the law) and Article 21 (right to live with dignity) of the Constitution, particularly for elderly veterans of conflicts like 1965 and 1971. “Many now face a 20–25% or up to 30–34% reduction in net income through taxation, with limited means to supplement it at this life stage. The policy also breaches the implied service contract terms upheld for decades — for the last 104 years in fact,” says Sharma.

Veterans say that promotions and appointments are often affected by medical downgrading (except for war injuries). So, continuing in service despite a disability already involves career losses. Taxing the pension adds a further penalty for resilience.

Many others have also voiced their concern and extended support. Captain Viriato Fernandes, a former Navy officer who is the South Goa MP, has written to Defence Minister Rajnath Singh to reconsider the contentious proposal.

Lt Gen (retd) DP Vats has similarly sent a letter to the Finance Minister for withdrawal of the proposed amendment as has Congress MP Karti Chidambaram. Shashi Tharoor, another Congress MP, said in the ongoing Parliamentary session that the move “weakens social protection for disabled veterans who risked their lives for our country”. Former chief of army staff General VP Malik (retd) has called it a “totally unjustified” measure.

Why has the government taken this step?

The government has not explicitly stated a reason but has indicated that the move aims to streamline exemptions.

The Union Budget’s total defence allocation for 2026-27 was around Rs 7.84 lakh crore. Of this, 21% — or Rs 1.71 lakh crore — was towards defence pensions. The outlay on defence pensions is a 6.5% increase over the FY 2025-26 Budget Estimates.

The government has long been looking to cut down on its revenue expenditure (such as pensions) in defence and ramp up capital expenditure. The move to remove the exemption is likely in line with this larger push.  But critics like Col Sharma say that the fiscal impact could be negligible as superannuated recipients outnumber those “invalided out”.

Some sources also suggest the move addresses alleged misuse of the exemption by certain personnel. Opponents say that if misuse exists, verification processes should be strengthened rather than punishing the entire group.

How many armed forces personnel are currently drawing a disability pension?

Between 10,000–12,000 armed forces personnel (Army, Air Force, Navy) receive disability pensions annually, according to a 2021 Parliament reply. Current figures are not available.

Another Lok Sabha reply by the Ministry of Defence stated that 54,846 defence personnel were provided disability pensions over the five years from 2016 to 2020.