Defence veterans and ex-servicemen, and Agniveers

Ex-servicemen navigating which of their pensions and retirement benefits are tax-free, and how a second-career business is taxed, an under-served, respected cohort.

Defence retirees get unusually generous exemptions. Commuted pension, retirement gratuity and leave encashment are fully exempt for government and defence personnel, the civilian ceilings (such as the Rs 25 lakh leave-encashment cap or the Rs 20 lakh gratuity cap) do not apply to you. The regular (uncommuted) pension is taxable as salary. From 1 April 2026 the armed-forces disability-pension exemption (the service and disability elements where you were invalided out) is put on an express statutory footing and extended to paramilitary forces. Agniveers' Seva Nidhi payout is fully exempt. And a second-career business (security agency, logistics, training) is a Section 44AD business, not 44ADA.

Last reviewed: 22 May 2026

Guidance, not advice. We explain the rules, we don't assess your situation. Always seek financial or tax advice from your accountant, or contact Income Tax Department. Read our editorial scope →

Ex-servicemen face a tangle of pension and benefit rules, much of it generous but poorly explained, plus the question of how a second career is taxed. This page sorts the exempt from the taxable and corrects the common 44ADA error on post-service businesses.

Commuted pension, gratuity and leave: fully exempt

For government and defence personnel, commuted pension is fully exempt (Section 10(10A)(i)), retirement gratuity is fully exempt (Section 10(10)), and leave encashment on retirement is fully exempt (Section 10(10AA)(i)). The civilian caps, such as the Rs 25 lakh leave-encashment ceiling and the Rs 20 lakh gratuity ceiling, apply to later private-sector employment, not to your defence retirement benefits. The regular monthly (uncommuted) pension is taxable as salary, with TDS by the pension disbursing authority. Gallantry-award pensions are fully exempt under Section 10(18).

Defence commuted pension, retirement gratuity and leave encashment are fully exempt (Sections 10(10A)(i), 10(10), 10(10AA)(i)); the civilian caps do not apply; regular pension is taxable as salary. (Income-tax Act 1961 ss.10(10A)/(10)/(10AA)/(18) (re-enacted in the Income-tax Act 2025); s.17 (pension as salary))

Disability pension: now codified (from April 2026)

The exemption for armed-forces disability pension was for years a matter of CBDT circulars and litigation. From 1 April 2026 (tax year 2026-27) it is on an express statutory footing: the disability pension (both the service element and the disability element) is exempt where the person was invalided out of service due to a bodily disability attributable to or aggravated by service, and the exemption is extended to paramilitary forces. It does not apply where retirement was on superannuation or otherwise. So for 2026-27 this is settled statutory law, not litigation-pending. Note this is separate from the Section 80U disability deduction.

From 1 April 2026 the disability-pension exemption (service plus disability element, where invalided out) is express statutory law, extended to paramilitary; superannuation retirement is not covered. (Finance Bill 2026 (disability-pension exemption codified, effective 1 April 2026); distinct from Income-tax Act 1961 s.80U (disability deduction))

Agniveers, and a post-service business is 44AD not 44ADA

For Agnipath recruits, the Agniveer's own contribution to the Agniveer Corpus Fund is deductible under Section 80CCH (in both regimes), the government's contribution is exempt, and the Seva Nidhi lump-sum payout on the four-year exit is fully exempt under Section 10(12C). On a second career: a veteran's business, a security agency, logistics or contracting, is a Section 44AD business (6 or 8%), not the 44ADA 50% professional scheme. Training or advisory work is also generally 44AD, unless it is genuine technical consultancy (the work of a scientist or technocrat). Do not default a post-service training business to 44ADA.

Agniveer Seva Nidhi payout is fully exempt (10(12C)) and contributions deductible (80CCH); a veteran's post-service business uses Section 44AD, not 44ADA. (Income-tax Act 1961 s.80CCH + s.10(12C) (Agnipath) (Income-tax Act 2025 s.125); s.44AD (post-service business))

Support schemes and tax treatment

Disability pension exemption

Eligibility: Invalided out due to service-attributable disability (incl paramilitary from 2026)

Tax treatment: Service + disability element exempt (express statute from 1 Apr 2026)

Agniveer Corpus / Seva Nidhi (80CCH / 10(12C))

Eligibility: Agnipath recruits

Tax treatment: Own contribution deductible (both regimes); Seva Nidhi payout fully exempt

ECHS and CSD facilities

Eligibility: Ex-servicemen

Tax treatment: Non-taxable welfare facility (no charging provision)

Allowable expenses in context

A veteran's exempt pension and benefits are reported in the exempt-income schedule, while a second-career business deducts ordinary expenses or uses deemed profit under Section 44AD. The family pension (other sources) carries a Rs 25,000 deduction that is, unusually, available under the new regime too. Keep the exempt benefits and the taxable business clearly separated in one return.

Worked example

Colonel (Retd) Menon — Pune, MH

retired army officer running a security-services business (2026-27)

Colonel Menon receives a defence pension and lump-sum retirement benefits, and starts a security-services firm. He is told his consultancy income should use the 44ADA 50% scheme.

His commuted pension, retirement gratuity and leave encashment are fully exempt as a defence retiree (no civilian caps), reported in the exempt-income schedule; his regular monthly pension is taxable as salary. His security-services firm is a business, so it uses Section 44AD at 6 or 8%, not 44ADA at 50%, the 50% scheme is for specified professions, which his business is not. Treating it as 44ADA would overstate his income substantially. If he had a service-attributable disability pension, that would be exempt under the 2026 statutory provision.

Frequently asked questions

Are my defence retirement benefits taxable?+

Largely not. For defence personnel, commuted pension, retirement gratuity and leave encashment are fully exempt, and the civilian caps (Rs 25 lakh leave encashment, Rs 20 lakh gratuity) do not apply to you. The regular monthly (uncommuted) pension is taxable as salary, and gallantry-award pensions are fully exempt. Report the exempt benefits in the exempt-income schedule of your return.

Is the armed-forces disability pension tax-free?+

Yes, and from 1 April 2026 it is written into the law itself. The service element and disability element are exempt where you were invalided out of service due to a disability attributable to or aggravated by service, and the exemption now extends to paramilitary forces. It does not apply to retirement on superannuation. For 2026-27 this is settled statutory law, not litigation-pending.

I am starting a business after service. Which presumptive scheme?+

Section 44AD, the business scheme at 6 or 8% of turnover, for a security agency, logistics, contracting or similar. Not the 44ADA 50% professional scheme, which is only for specified professions. Even training or advisory work is generally 44AD unless it is genuine technical consultancy (scientist or technocrat). Do not let advisers default your post-service business onto 44ADA.

How is the Agniveer Seva Nidhi taxed?+

Favourably. An Agniveer's own contribution to the Agniveer Corpus Fund is deductible under Section 80CCH (in both the old and new regimes), the government's matching contribution is exempt, and the Seva Nidhi lump sum paid on the four-year exit (your contribution plus the government's plus interest) is fully exempt under Section 10(12C). There is no recurring pension under the Agnipath scheme.

Last reviewed: 22 May 2026