Assessment
Disability Pension is Tax-Free Even In Case of Voluntary Retirement!
A recent judgment by a tax tribunal throws light on this. If you receive a “disability pension”, then, even if he opted for voluntary retirement from the Armed Forces, the amount of disability pension will be tax-free.
This post will explain all the issues about the exemption of “disability pension “, which has created much “mental agony” from the action of disallowing “exemption” than the disability itself, which is a “physical pain”.
What is Disability Pension?
The term disability pension is not defined under the Income Tax Act, nor is there any clear provision of law that exempts the disability pension. For example, section 10 of the Income Tax Act, which exempts various kinds of income from being included in total income, does contain a provision under sub-sections 18 and 19 for tax exemption to certain types of pension related to Gallantry Award winners, etc. But, nothing is mentioned about the army disablement pension.
Armed forces allow pensions to not only personnel who get a pension for disability attributable to or aggravated by the service condition but also another type of pension called “invalid Pension” to people who get invalidated for reasons other than war/battle or service conditions.
The fact remains that both pensions are granted on account of some disablement, but the nature of the pension, the circumstance under which it is granted and the quantum of pension granted are different.
An invalid pension is granted to an individual who has completed a qualifying service of 10 years or more and is invalided out of service with a disability that is neither attributable to nor aggravated by service (NANA).
In that case, he/she may be given the service element of pension but not the disability element.
Types of Disability Pension & its Computation
The disablement pension has two parts, i.e., Service Part and Disability Part. Both are computed separately and have separate pension pay orders (PPO). The service part is fixed at 505 of the last pay drawn, just like a normal retiring pension. However, the disability part is decided upon the percentage of disablement as decided by the Release / Invalidment Medical Board (RMB/IMB). A person may get a normal retirement pension (subject to a qualifying service period) and a disability pension. In this post, we only discuss the taxation of the amount of pension received on grounds of disablement by the RMB/IMB.
| Type of Disability | Disability | Disability Pension to War/Battle Disabled Person | Disability Pension to other than War/Battle Disabled Person |
| less than 20% disability | Nil disabled | Nil | |
| 21% to 50% | 50% disabled, | 30% of the last pay drawn | 15% |
| 51% to 75% | 75% disabled | 45% of the last pay drawn | 22.5% |
| Exceeding 75% | 100 % disabled | 60% | 30% |
Read more on army pension rules.
Tax Exemption on Disability Pension
The entire pension, that is, the service pension)as well as disability element is exempted from the purview of Income Tax as clarified in Instruction No 2/2001 dated 02 July 2001, Instruction No 136 dated 14 January 1970, and Instruction No 2/ 2001 dt 2/07/2001 made it crystal clear that both elements of the disability pension-service element and disability element- shall be tax-free. All these instructions and circulars are reproduced below :
Instruction No 136 dated 14 January 1970
Instruction No 136
F. No. 34/3/68-IT(AI)
Govt. of India
Central Board of Direct Taxes
New Delhi, dated the 14th Jan 1970
From: Shri S N Nautial
Secretary, CBDT
To: All Commissioners of Income Tax
Subject: Exemption – Service and Disability Element of Disability Pension granted to a disabled officer of the Indian Army – whether exempted from Income Tax.
Reference is invited to the Board’s Letter F No 42/9/59-IT(AI), dated the 5th Sept 1960 on the above subject wherein it was mentioned that in the cases falling under Item (29) of Finance Deptt Notification No 878-F (Income Tax) dated 21-3-1922, the ‘disability element’ of the disability pension received by an officer of the Army will only be exempted from tax and that the ‘service element’ will be subjected to tax.
2. On reconsideration of the matter, in consultation with the Ministry of Law, the board are advised that item 29 of the notification does not differentiate between types of pensions. Accordingly in the cases falling under item 29 of the above notification, entire disability pension will be exempted from income-tax.
3. The above instructions may be brought to the notice of all assessing officers in your charge
Yours faithfully,
Sd / - (S N Nautial)
Secretary CBDT
CBDT Circular No. 2/2001-dt 2nd July 2001
Instruction No 2/ 2001
F.No. 200/51/99-ITA. I
Govt. of India
Ministry of Finance
Deptt of Revenue
Central Board of Direct Taxes
New Delhi, the 2nd July, 2001
To: All Chief Commissioners of Income-Tax All Directors General of Income-Tax
Subject: Exemption from Income Tax to disability pension, i.e., “disability element” and “service element” of a disabled officer of the Indian Armed Forces – Instructions regarding
Sir,
References have been received in the Board regarding exemption from Income Tax to disability pension, i.e., “disability element” and “service element” of a disabled officer of the Indian Armed Forces.
2. It appears that field formations in certain cases are not uniformly allowing disability pension inspite of Board’s Instruction No 136 dated 14th January 1970 (F No 34/3/68-II(AI) ).
3. The matter has been re-examined in the Board and it has been decided to reiterate that the entire disability pension, i.e, disability element and service element of a disabled officer of the Indian Armed Forces continues to be exempt from Income Tax.
4. This may be brought to the notice of all officers working under you.
Yours faithfully
Sd /- (B L Sahu)
OSD (ITA-I)
Who Does Not Get Tax Exemption?
CBDT issued circular no 13/2019, which answered whether the exemption applies only to the disabled officers of the Armed Forces or all disabled Armed Forces Personnel (i.e., officers and Jawans).
However, the answer incorporated certain other phrases and words that acted to prevent exemption for many. The answer was: “such tax exemption will be available only to armed forces personnel who have been invalided from service on account of bodily disability attributable to or aggravated by such service and not to personnel who have been retired on superannuation or otherwise.“
Circular No. 13/2019-Income Tax
F. No. 173/250/2019-ITA-1
Government of India
Ministry of Finance
Department of Revenue
Central Board of Direct Taxes
North Block, New Delhi
Dated: 24th June, 2019
Subject: Exemption of service element and disability element of disability pension granted to disabled personnel of armed forces who have been invalided on account of disability attributable to or aggravated by such service–reg.
Under the existing provisions of clause (i) of sub-section 2 of section 297 of the Income tax Act, 1961 (‘Act’) any notification issued under sub-section (1) of section 60 or section 60A of the Indian Income-Tax Act, 1922 (now repealed) and in force immediately before the commencement of the Act shall continue to be in force to the extent to which no provision has been made under the Act. Previously, in exercise of powers conferred under section 60 of the Indian Income-Tax Act, 1922, vide Notification no. 878 F dated 21.03.1922, it was ordered at para 19 that “pensions granted to members of His Majesty’s naval, military or air forces who have been invalided for naval, military or air force service on account of bodily disability attributable to or aggravated by such service would be exempt from tax under the Indian Income Tax Act, 1922″.
2. In furtherance to the above, instruction 136/1970 dated 14.01.1970 in F.No. 34/3/68 IT(AI) and instruction no. 2/2001 dated 02.07.2001 in F.No. 200/51/99-ITA-1 have been issued to clarify that the entire disability pension, i.e. “disability clement” and “service clement” of a disabled officer of the Indian Armed Forces continues to be exempt from income tax under the Income-tax Act, 1961.
3. Representations have been received, requesting to clarify whether the exemption is applicable only to the disabled officers of Armed Forces or all disabled Armed Forces Personnel (i.e. including officers and Jawans). Representations have also been received to clarify as to whether the Income Tax exemption would be limited to only such disabled Armed Forces Personnel who arc invalided out of service due to disability attributable to or aggravated by military service condition or to even those who retire after full service with some disability.
4. The matter has been examined in the The notification no. 878-F dated 21.03.1922, provides income tax exemption to all members of Armed Forces who have been invalided for naval, military or air force service on account of bodily disability attributable to or aggravated by such service. Thus, income-tax exemption under above clause would be available to all armed forces personnel (irrespective of rank) who have been invalided for such service on account of bodily disability attributable to or aggravated by such service.
5. Further, such tax exemption will be available only to armed forces personnel who have been invalided from service on account of bodily disability attributable to or aggravated by such service and not to personnel who have been retired on superannuation or otherwise.
-sd –
(Rajarajeswari R.)
Under Secretary to the Government of IndiaSupreme Court Stays Cirular 13/2019
Hon’ble Supreme Court in the case of Shri Pradeep Mathur & Ors. Vs., Union of India & Ors. in W.P.(C) No.953/2019 dated 30.08.2019 wherein the Hon’ble Supreme Court directed the respondents ‘pending further consideration, the parties shall maintain status quo in the matter’.
Therefore, it is clear that as long as the final order comes from the Apex Court, no cognizance of Circular 13/2019 can be taken. In other words, Instruction No. 2/2001 remains valid and has to be followed. Under that circular, the entire disability pension, i.e., disability element and service element of a disabled officer of the Indian Armed Forces, continues to be exempt from Income Tax.
Government Position on TDS on Disability Pension
Even the government, while answering the unstarted question no 3221, reply was given by the Minister of State in the Ministry of Defence not to recover Income Tax until the Hon’ble Supreme Court makes a final decision. The relevant portion of the reply is as follows:
Hon’ble Supreme Court in its order dated 30.08.2019 in Writ Petition(s) Civil No. 953/2019 directed the parties to maintain the status quo in the matter.
In view of Hon’ble Supreme Court’s order dated 30.08.2019, on the direction of Ministry of Defence, PCDA(P) Allahabad has issued Circular No. 211 on 03.03.2020 to Pension Disbursing Agencies (PDAs) not to make recovery of Income Tax till a final decision is taken by the Hon’ble Supreme Court in the matter. The matter is still sub-judice in the Hon’ble Supreme Court.
Based on the Ministry of Finance directive dated 2/03/2020, PDCA, Allahabad issued circular no 2011 dt 3/03/2020 not to make any TDS on the “Disability Pension”.
Case Laws Allowing Full Exemption
The following case laws support the view that in the absence of any Circular 13/2019 cognisance by the Supreme Court’s status quo order, the disability pension in any form given to defence forces personnel shall be exempt as per Circular 2/2001.
| Case | Facts | Decision | |
| Col. Jaswinder Pal Singh (Retd) vs PCIT – Punjab & Haryana Court . CWP-19198-2022 Date of decision:26.04.2023 | The assessee’s petition of revision of return income in which he inadvertently did not claim exemption was rejected | Col. Jaswinder Pal Singh (Retd) vs PCIT – Punjab & Haryana Court. CWP-19198-2022 Date of decision:26.04.2023 | |
| Shri Aradhya Ghosh Vs. Deputy Commissioner of Income-tax in ITA No.1788/Del/2022 dated 14.10.2022 | The retirement was voluntary. No tds was made on disability pension. | The retirement was voluntary. No TDS was made on a disability pension. | |
| Manish Roy, Bangalore vs Income-Tax Officer ITA No.6/Bang/2023 Assessment Year: 2017-18 | The assessee’s petition of revision of return income in which he inadvertently did not claim exemption was rejected. | The Tribunal based its order on ITAT, Delhi’s order in the case of Shri Aradhya Ghoshgave relief to the assessee. |
Conclusion on tax exemption of disability pension
Till the final outcome on the petition challenging CBDT Circular 13/2019 comes, my opinion on the exemption to defence force staff who are given -“Disability Pension” is as follows:
- It is fully tax-free -both the service and disability part.
- It is available to all kinds of Armed Forces Personnel.
- It is available if you are paid disability pension and you sought voluntary retirement.
