The Finance Bill, 2026 proposes to place the long-standing tax exemption for disability pension of armed forces personnel on a clear statutory footing under Schedule III of the Income-tax Act, 2025. Disability pension, comprising both the service element and the disability element, will be expressly exempt from tax only where the individual has been invalided out of service due to a bodily disability attributable to, or aggravated by, military, naval or air force service. The exemption will not apply where retirement is on superannuation or otherwise. Importantly, the benefit is extended to members of the paramilitary forces as well. The amendment replaces reliance on repeal-and-savings provisions, notifications, and circulars with a direct legislative provision, bringing clarity and certainty. The change ensures that tax relief is targeted at personnel whose service ended due to service-related disability, while excluding routine retirements. The amendment takes effect from 1 April 2026 and applies from tax year 2026–27 onwards.
Exemption for Disability Pension to armed force personnel
Disability pension is granted to members of the Armed Forces who are invalided out of service on account of a bodily disability that is attributable to, or aggravated by, military, naval or air force service, and comprises a service element and a disability element. The exemption was first provided under the Indian Income-tax Act, 1922. This has continued under the Income-tax Act 1961 through the repeal and savings clause, and notifications, administrative instructions and clarificatory circulars.
2. It is proposed to provide for exemption of disability pension, including both the service element and the disability element, only in cases where the individual has been invalided out of Armed Forces service on account of a bodily disability attributable to, or aggravated by, such service, and not where the individual has retired on superannuation or otherwise. It is also proposed that this exemption will also be available to paramilitary personnel.
3. These amendments shall take effect from the 1st day of April, 2026, and shall apply in relation to the tax year 2026-27 and subsequent tax years.
[Clause 108]
Extract of Relevant Clauses of Finance Bill, 2026
Clause 108 of the Bill seeks to amend Schedule III to the Income-tax Act, 2025 relating to income not to be included in total income of eligible persons.
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.
It is further proposed to amend the Table in the said Schedule so as to provide exemption to an individual or his legal heir, on any interest awarded on compensation under the Motor Vehicles Act, 1988.
It is proposed to amend the said Schedule so as to provide exemption on any income in respect of any award or agreement made on account of compulsory acquisition of any land, carried out on or after the 1st April, 2026 under the Right to Fair Compensation and Transparency in Land Acquisition, Rehabilitation and Resettlement Act, 2013 (other than the award or agreement made under section 46 of said Act).
These amendments will take effect from 1st April, 2026 and will, accordingly, apply in relation to the tax year 2026-2027 and subsequent years.
Extract of Relevant Amendment Proposed by Finance Bill, 2026
108. Amendment of Schedule III.
In Schedule III to the Income-tax Act, in the Table, after serial number 38 and the entries relating thereto, the following shall be inserted, namely:—
| A | B | C | D |
| 38A. | Disability Pension received (including service element and disability element). | An individual who has been a member of the armed forces (including paramilitary forces) of the Union. | (a) The individual has been invalided out of service in the armed forces on account of bodily disability attributable to, or aggravated by such service; and
(b) the individual has not retired on superannuation or otherwise. |
| 38B. | Any interest on compensation amount awarded by Motor Accident Claims Tribunal. | An individual or his legal heir. | Such interest is received under the Motor Vehicles Act, 1988 (59 of 1988). |
| 38C. | Any income in respect of any award or agreement made on account of compulsory acquisition of any land. | An individual or a Hindu undivided family. | Such award or agreement is made under the provisions of the Right to Fair Compensation and Transparency in Land Acquisition, Rehabilitation and Resettlement Act, 2013 (30 of 2013), except under section 46 of the said Act. |
