When India’s Finance Minister introduced the budget in parliament on 1st February 2026, she also introduced a specific distinction in the Finance Bill to redefine who qualifies for income tax exemptions on disability pensions. While the government’s primary aim is to `rationalise’ disability pension attributable to ‘battle-induced injury and disability’ versus ‘those who enjoyed the privilege of serving till superannuation with disabilities, ‘ whether ‘attributed to battle’   or `life style’induced’ to plug tax loopholes and mop up more revenue for project financing. Whereas, many veterans, including some former top commanders, have labelled the new rule as a ‘tax on valour’ and even made inferences alluding that the new tax will dissuade the Armed Forces personnel from taking risks in the face of the enemy. The furor centers on the removal of a century-old income tax exemption that has been in place since 1922.

The controversy stems from a significant policy shift introduced in the Union Budget 2026, and has ignited a heated debate between the government and the veteran community, touching on issues of morale, equity, and the definition of military sacrifice.  Just days after the Budget announcement, the Supreme Court (Feb 12, 2026) held in a separate ruling (UoI vs Sgt Girish Kumar) that disability pension is “not a matter of largesse but a recognition of sacrifice. .Many retired Armed Forces personnel, including some senior veterans who are social influencers, have been critical of the new rule. Many are now indulging in a social campaign to put pressure on the government to repeal the new rule.  In light of the concerted campaign being run by veterans supported by the media, it is imperative that the real intent of the new rule is shared in the public domain and sensitise the veterans and citizenry as to how it will impact the Armed Forces personnel, both retiring and retired. If the disabled veterans reconcile to the fact that they also have a moral responsibility of contributing towards nation building, by paying tax like their other colleagues, their unfounded grouse will vanish.

The New Disability Pension Rule

It is important to understand the provisions of the new rule, and we need to view it from an impartial perspective. The new rule effectively divides disabled veterans into two distinct legal categories, based on their mode of exit from the service: –

• ‘Invalided Out’ (Tax-Exempt Category). Personnel in this category remain eligible for full tax exemption on both the “service element” and the “disability element” of their pension. To be ‘invalided out’  a soldier must be forced to leave the service midway through their career because their disability is so severe that a Medical Board finds them unfit for further military duty.  The disability must be certified by a Medical Board as being attributable to (caused by) or aggravated by (worsened by) military service. The government views this as a “true” disability pension meant for those whose careers were cut short by their sacrifice.
• ‘Superannuated’ (Taxable Category). Personnel in this category lose their tax exemption starting April 1, 2026 (Assessment Year 2027-28). These are soldiers who sustained a disability during their service (such as loss of a limb, hearing, or eyesight) but were retained in service in ‘sheltered low-risk appointments’  or ‘ administrative roles’. They continue to serve until they reach their natural retirement age (superannuation).  Even if their disability is 100% attributable to military service, they are now classified as ‘retiring on superannuation’ rather than ‘invalided out’. Under the Entitlement Rules 2023, the disability component for these personnel is often termed ‘Impairment Relief’ rather than ‘Disability Element’ to distinguish it from the pension given to those invalided out.

Comparison of the Two Categories

The Core of the Controversy

The primary criticism from veterans about the new rule is that the nature of the injury is identical, but the tax treatment is now different: –

• ‘Endurance Penalty’.  Critics of the new policy argue that a soldier who shows the grit to continue serving despite a disability is effectively being ‘penalised’ by having their pension taxed, while a soldier who leaves early gets a tax-free life.
•  Change in Terminology. By renaming the `Disability Element’  as ‘Impairment Relief’  for superannuated personnel, the government has technically argued that these individuals aren’t receiving a “disability pension” in the traditional sense, thereby justifying the withdrawal of the tax exemption.

For over a century (since 1922), disability pensions for the Armed Forces personnel were entirely exempt from income tax. However, the Finance Bill 2026 has proposed to restrict this full tax exemption to only one specific category –  personnel who are “invalided out” (forced to leave) of service due to their disability. The controversy arises because the new law explicitly excludes personnel who:-

• Sustained a disability during service but continued to serve until their normal retirement (superannuation).
• Took premature retirement but were not “invalided out” by a medical board.

The veteran community and several former high-ranking officers have criticised the move on the following grounds:-

• Creation of ‘Two Classes’ of Soldiers. Veteransargue that the law creates an unfair distinction between two soldiers who may have suffered the same injury in the same battle. One is rewarded with tax-free benefits because they left service, while the other is “penalised” for showing the resilience to continue serving despite their disability.
• The ‘Misuse” Argument’.  The government has suggested that the new policy aims to plug loopholes where some personnel allegedly claim disability benefits just before retirement to gain tax exemptions. Veterans argue that if misuse exists, it should be handled through internal military discipline rather than a blanket tax on all disabled superannuated personnel.
• Dignity and Morale. Many senior veterans have stated that this “tax on valour” hits the dignity of soldiers and they contend that a disability—such as the loss of a limb or eyesight—remains a lifelong burden regardless of whether the soldier retired normally or was forced out early.

Legal Context and Supreme Court Rulings

The government’s attempt to tax disability pensioners is not entirely new. In June 2019, the Central Board of Direct Taxes (CBDT) issued a similar circular, which was subsequently stayed by the Supreme Court. By amending the Income Tax Act itself in the 2026 Budget, the government has moved to bypass the previous legal hurdles. However, the Supreme Court has historically maintained that, “Pension is not a matter of largesse or charity, but a recognition of sacrifice and a vested property right protected under Article 300A of the Constitution.” The key arguments fueling the furore are:-

The Political and Social Fallout

The controversy has shifted from military barracks to the floor of Parliament also:-

• Opposition Resistance.  Some prominent political leaders have criticised the bill, arguing it violates Article 14 (Right to Equality) by treating equals (wounded soldiers) unequally.
• Moral & Ethos. Many feel this new rule is the ‘last nail in the coffin’ of soldiers’ honour and will erode the professional ethos of the military, coming on the heels of other contentious changes like the Agniveer scheme.
• Financial Impact. For elderly veterans living on fixed pensions, the sudden imposition of tax can lead to a 10-20% drop in net monthly income, particularly affecting those who served in major historical conflicts.

Conclusion

            The new statutory solution brought in by amending the Income Tax Act will certainly lead to a drop of 10- 20% in the annual income of most of the soldiers who have retired in the past, and those who will retire will certainly lead to a drop of 10-20% in their annual income, depending on their pension emoluments.  Most disability pensioner’s income ranges between Rs 8,00,000/- and 20,00,000/ per annum, and with the current tax slab, their tax liability varies from 5% to 20%. Most veterans at the of 60 years would have fulfilled their monetary obligations towards the family and asset creation by this age and they would now require less money towards sustaining life. Major financial expenditure in old age is for medical cover, which is taken care by the Govt.  Therefore, a drop in income of this magnitude can certainly be endured by the veterans as a contribution towards nation-building. A sincere appeal to the disability pensioners is that all of us need to contribute towards nation-building after our retirement also.  The new policy is a good opportunity to the veterans to contribute towards nation-building by paying the tax.  Your fellow veterans have been paying the tax like any other normal citizens. For making our country ‘Vikisit Bharat by 2047’, every citizen should contribute, and we should do our bit without cribbing.

Title Image Courtesy: ET

Disclaimer: The views and opinions expressed by the author do not necessarily reflect the views of the Government of India and the Defence Research and Studies.