Clause 108 of the Finance Bill, 2026 proposes an important amendment to Schedule III of the Income-tax Act, 2025, which lists incomes that shall not be included in total income.
A key welfare-oriented change introduced through this clause is the explicit statutory exemption of disability pension received by armed forces and paramilitary personnel who are invalided out of service due to service-related disability.
This amendment brings long-awaited clarity by embedding into law what was earlier governed largely by administrative instructions and judicial precedents.
What Is Disability Pension?
Disability pension is granted to personnel of:
- the Army, Navy and Air Force, and
- paramilitary forces,
who are invalided out of service due to a bodily disability that is:
- attributable to service, or
- aggravated by service.
Disability pension typically consists of two components:
- Service element – linked to length of qualifying service
- Disability element – compensation for the service-related disability
Existing Legal Position (Before Finance Bill 2026)
- The exemption for disability pension originated under the Income-tax Act, 1922.
- It continued under the Income-tax Act, 1961 through:
- repeal and savings provisions,
- CBDT circulars, and
- administrative clarifications.
- However, no explicit provision existed in the statute, leading to:
- disputes on taxability of the service element, and
- avoidable litigation despite settled intent.
What Clause 108 Proposes
Clause 108 amends Schedule III of the Income-tax Act, 2025 to expressly exempt:
✔ Disability pension,
✔ including both service element and disability element,
✔ received by an individual invalided out of service,
✔ where the disability is attributable to or aggravated by service.
The exemption is proposed to apply equally to:
- armed forces personnel, and
- paramilitary personnel.
Important Limitation: When Exemption Will NOT Apply
The exemption shall not be available if the individual:
- retires on superannuation, or
- retires for reasons other than invalidation due to disability.
This ensures that the benefit is strictly confined to genuine cases of service-related disability, and not routine retirement benefits.
Legislative Intent Behind the Amendment
The objective of Clause 108 is to:
- codify a long-standing tax relief into statute,
- remove ambiguity around taxability of pension components,
- honour the sacrifice of personnel forced to leave service due to disability, and
- reduce unnecessary litigation.
Practical Implications for Taxpayers
- Disability pension recipients will have clear statutory backing for exemption
- No distinction between service element and disability element for tax purposes
- Reduced scrutiny, notices and disputes during assessments
- Greater certainty for pensioners and their families
Effective Date
- Applicable from: 1 April 2026
- Relevant for: Tax Year 2026-27 and subsequent years
Conclusion
Clause 108 of the Finance Bill, 2026 is a significant and compassionate reform that formally recognises disability pension as a tax-exempt income for armed forces and paramilitary personnel invalided out due to service-related disability.
By providing explicit statutory exemption, the amendment reinforces certainty, fairness and respect for those who have suffered disability in the line of duty.
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