Union Budget 2026: FM Sitharaman Revises Tax Exemption Rules for Armed Forces Disability Pensions

In the Union Budget 2026, presented by Finance Minister Nirmala Sitharaman, an important change was proposed that only those who leave service due to a disability caused or aggravated by their military service will have both the service and disability portions of their pension exempt from tax.

A disability pension is given to members of the Armed Forces who have to leave service because of a disability caused by, or worsened due to, their military service. The pension has two parts, one based on their years of service and another based on the disability itself. This tax exemption for disability pension was first introduced in the Indian Income-tax Act of 1922 and has continued under the Income-tax Act of 1961, supported by official notifications and guidelines. Here’s what she proposed:

It is proposed that disability pensions covering both the service and disability portions will only be exempted if the person had to leave the Armed Forces due to a disability caused or worsened by their service. This exemption will not apply to those who retire normally or for other reasons. The same rule will also apply to paramilitary personnel.

These changes will be made effective from April 1, 2026 and will apply in relation to the tax year 2026-27 and subsequent tax years.