Taxability of Pension and Disability Pension for Defence Personnel in India: A Detailed Report

Regular Pension: Taxable as Salary

Pensions received by retired defence personnel, much like civilian employees, are categorised as 'Salary' under the Income Tax Act and are subject to taxation based on the applicable income tax slabs. This includes both the uncommuted (monthly) pension and the commuted (lump-sum) portion, with certain exemptions available for the latter.

Uncommuted pension is fully taxable. For commuted pensions, government employees, including defence personnel, are entitled to a full exemption on the commuted amount received.

Disability Pension: A Complete Tax Exemption

A key area of relief for disabled veterans is the complete tax exemption on their disability pension. This exemption covers both components of the disability pension:

• Service Element: This is the portion of the pension that corresponds to the years of service rendered by the personnel.

• Disability Element: This is an additional amount granted on account of the disability sustained, which is attributable to or aggravated by military service.

The legal basis for this exemption is rooted in CBDT Circular No. 2/2001 dated July 2, 2001, which explicitly clarifies that the entire disability pension, comprising both the service and disability elements, is exempt from income tax. This circular has been the cornerstone for the tax-free status of disability pensions for armed forces personnel.

The Controversy Surrounding Circular No. 13/2019

The long-standing tax exemption on disability pensions faced a challenge with the issuance of CBDT Circular No. 13/2019 on June 24, 2019. This circular sought to limit the tax exemption only to those armed forces personnel who were "invalided" from service on account of bodily disability. This implied that personnel who completed their service tenure and retired with a disability would no longer be eligible for the tax benefit on their disability pension.

This move sparked considerable debate and legal challenges. The matter reached the Supreme Court of India, which has currently stayed the operation of Circular No. 13/2019. Consequently, the position prior to this circular, as established by CBDT Circular No. 2/2001, prevails. This means that as of now, the entire disability pension received by defence personnel remains exempt from income tax, regardless of whether they were invalided out of service or retired after completing their tenure.

Other Pension-Related Tax Exemptions for Defence Personnel

Beyond the disability pension, the Income Tax Act provides for other specific exemptions for pensions received by defence personnel and their families:

• Gallantry Award Winners: As per Section 10(18) of the Income Tax Act, pension received by an individual who has been awarded the Param Vir Chakra, Maha Vir Chakra, Vir Chakra, or other notified gallantry awards is fully exempt from income tax. This exemption also extends to the family pension received by the family members of such awardees.

• Family Pension for Death in the Line of Duty: Under Section 10(19) of the Income Tax Act, family pension received by the widow, children, or nominated heirs of a member of the armed forces (including para-military forces) is exempt from income tax if the death of the member has occurred in the course of operational duties, subject to prescribed conditions.

While the Income Tax Act, 1961 does not have a single, explicitly dedicated section that states "disability pension for armed forces is exempt," the exemption is granted and clarified through notifications and circulars issued by the Central Board of Direct Taxes (CBDT), drawing authority from the Act.

The key clarification for the tax exemption on the entire disability pension (both service and disability elements) for armed forces personnel comes from:

• CBDT Circular No. 2/2001 (F. No. 200/51/99-ITA-I), dated July 2, 2001.

This circular is the primary document that taxpayers and tax authorities rely upon to confirm the tax-exempt status of disability pensions for military personnel. It clarified that the entire disability pension, including both the "disability element" and the "service element," is not taxable.

This circular was issued to clear up confusion and has been the basis for the exemption for many years. Although a later circular in 2019 (Circular No. 13/2019) attempted to limit this exemption, the Supreme Court of India has stayed its implementation, meaning the broader exemption provided by the 2001 circular is currently in effect.

There might be a slight confusion in terminology, but essentially, "Disability Pension" and "Defence Medical Disability Pension" refer to the same benefit for armed forces personnel in India.

The term "Defence Medical Disability Pension" is simply a more descriptive way of referring to the "Disability Pension." The word "Medical" is used to emphasize that the disability is assessed and certified by a duly constituted military Medical Board. This board determines the degree of disability and whether it is attributable to or aggravated by military service, which are the key conditions for granting this pension.

Therefore, you can consider the terms to be interchangeable. The official documentation and regulations primarily use the term "Disability Pension." This pension consists of two components:

1. Service Element: Granted for the length of service rendered.

2. Disability Element: Granted as compensation for the physical disability sustained.

Both elements of this "Disability Pension" (or "Defence Medical Disability Pension") are what is currently exempt from income tax, as per the prevailing CBDT circulars and the stay on the contrary notification by the Supreme Court.

In conclusion, while the regular pension of a retired member of the armed forces is treated as taxable income, there are significant and complete tax exemptions available for disability pensions and for pensions received by gallantry award winners and the families of personnel who have died in the line of duty. The current legal standing, following the Supreme Court's stay on the contentious Circular No. 13/2019, reaffirms the tax-free nature of the entire disability pension for all disabled veterans.