Budget 2026 Delivers Blow to Defence Personnel: Disability Pension Tax Exemption Restricted
CHANDIGARH: The Union Budget 2026-27 has sent shockwaves through the defence community with a significant change affecting disability pension taxation. In a move that has sparked immediate controversy, the government has proposed to remove income tax exemption for defence personnel receiving disability pension upon superannuation.
What Exactly Has Changed?
The budget document clearly states that tax exemption will now be limited specifically to armed forces personnel, including paramilitary forces, who have been "invalidated out of service on account of bodily disability." This means that only those medically boarded out of service due to disabilities attributable to military service will continue to enjoy the tax-free status of their disability pension.
Previously, all defence personnel receiving disability pension enjoyed complete income tax exemption, regardless of whether they retired through superannuation or were invalided out. The new provision explicitly excludes "cases of retirement on superannuation or otherwise" from this tax benefit.
Historical Context and Legal Battles
This move brings to fruition a controversial circular issued by the Central Board of Direct Taxes (CBDT) back in June 2019. Circular No. 13/2019 had attempted to limit tax exemption only to armed forces personnel who were "invalided" from service, but that circular was subsequently stayed by the Supreme Court following legal challenges.
Now, through the formal budget process, the government has effectively implemented what the CBDT circular attempted six years earlier, creating what veterans are calling a discriminatory two-tier system for disabled soldiers.
Veterans Voice Outrage and Concern
The defence community has reacted with strong disapproval to what they perceive as unfair treatment of soldiers who have served the nation.
Lt Gen Vijay Oberoi (retd), former Army vice-chief who lost his right leg in the 1965 Indo-Pak War but continued to serve, expressed deep concern about creating "two classes of disabled pensioner soldiers" for tax exemption purposes. He emphasized that a soldier suffers disability while serving the country, regardless of the manner of their retirement.
War veteran Brigadier Baljit Singh Gill (retd), a Vir Chakra recipient and president of The War Decorated India (TWDI), highlighted the practical implications. "Because of shortage of manpower, soldiers who become disabled during military service are retained in service by being given sheltered appointments for administration work," he explained. "They cannot be excluded by government for the purpose of tax exemption, especially when the court has also given a favourable judgment in such matters."
Widespread Impact on Defence Pensioners
The ramifications of this policy change are substantial, as disabled defence pensioners who retired on superannuation far outnumber those who were medically invalidated out of service. This creates a situation where the majority of disabled veterans will now face taxation on their disability pensions, while a smaller subset will continue to receive tax-free benefits.
The budget proposal covers both the service element and the disability element of pensions for qualifying personnel, but creates what many are calling an artificial and unfair distinction between soldiers who suffered similar disabilities in service to the nation.
As the defence community processes this significant policy shift, questions remain about how this will affect the morale of serving personnel and the financial well-being of retired veterans who have already sacrificed for national security.
