Income Tax for Armed Forces Personnel in India: Allowances, Pensions and Filing (AY 2026-27)

Serving and retired defence personnel face a tax situation that no generic salary guide covers properly. Your pay slip carries a dozen allowances that civilians never see, some of which are fully tax-free. Your pension may be exempt, partly exempt, or fully taxable depending on how you left service. And the new tax regime, which is now the default, quietly takes away most of the exemptions that defence pay is built around.

This guide covers what is taxable, what is not, and how to file correctly for AY 2026-27 (financial year 2025-26).

Your Salary Is Taxable, But Many Allowances Are Not

Pay and allowances received by members of the Army, Navy and Air Force are taxed as salary income under Section 15. Your pay office deducts TDS every month and issues a Form 16, exactly like a civilian employer.

What makes defence pay different is Section 10(14) read with Rule 2BB, which exempts a long list of special allowances granted to meet duties in difficult or hazardous postings. These are the main ones, with the monthly exemption limits:

Two points people regularly get wrong.

First, the exemption is capped at the amounts above, not at whatever you actually receive. If your counter insurgency allowance is ₹6,300 a month, only ₹3,900 is exempt and ₹2,400 a month is taxable salary.

Second, you cannot claim two of these for the same period. Rule 2BB does not permit stacking a field area allowance and a modified field area allowance for the same month.

Uniform and duty travel are covered separately: an allowance granted specifically to meet the cost of purchase or maintenance of uniform for duty is exempt to the extent actually spent, and conveyance or tour allowance is exempt to the extent actually used for official purposes.

The New Regime Takes Most of This Away

This is the single most important planning point for serving personnel, and it is widely misunderstood.

Under the new regime (Section 115BAC), which is the default for AY 2026-27, exemptions under Section 10(14) are withdrawn except for a short notified list: transport allowance for a disabled employee, conveyance allowance for official duties, travel or transfer allowance, and daily allowance on tour.

The field area, high altitude, counter insurgency, island duty and hill area exemptions in the table above are not on that list. Under the new regime they become fully taxable salary. HRA under Section 10(13A) and leave travel concession under Section 10(5) also go away.

The practical result is that the regime choice has to be recomputed with your actual allowance mix, not assumed. As the numbers below show, losing the field allowance exemptions is often not enough on its own to make the old regime worthwhile.

A Worked Comparison

Take an officer with gross pay of ₹18,00,000 for the year, of which ₹1,20,000 is counter insurgency allowance (₹10,000 a month) and ₹19,200 is high altitude allowance at the 9,000-15,000 feet rate. Only ₹3,900 and ₹1,060 a month respectively are within the Rule 2BB caps, so ₹59,520 is exempt under the old regime. Assume ₹1,50,000 of Section 80C investments (DSOP subscription, AGIF, insurance premium), ₹50,000 of voluntary NPS under Section 80CCD(1B), and ₹25,000 of Section 80D premium.

The new regime wins by more than ₹1.17 lakh, even though every field allowance exemption is lost. Wider slabs and the ₹75,000 standard deduction simply outweigh ₹59,520 of exempt allowances plus ₹2.25 lakh of deductions.

Now change one thing. Suppose the same officer is posted in a field area while the family lives in rented accommodation, so ₹3,00,000 of HRA is exempt under Section 10(13A), and there is ₹2,00,000 of home loan interest deductible under Section 24(b) on a let-out or self-occupied property.

Now the old regime is roughly ₹34,000 cheaper.

The pattern is consistent: special duty allowances alone are rarely enough to save the old regime, but HRA plus home loan interest usually is. Run both before you sign the annual declaration, and read our old vs new tax regime comparison for the full deduction-by-deduction picture.

A Note on NPS

Armed forces personnel are specifically excluded from the National Pension System and remain on the defined-benefit pension. That means the Section 80CCD(2) employer-contribution deduction, which is the main deduction civilian government employees carry into the new regime, is generally not available to you. If you have opened an NPS account voluntarily, the ₹50,000 deduction under Section 80CCD(1B) is available in the old regime only.

Disability Pension: Exempt Only If You Were Invalided Out

Disability pension paid to armed forces personnel consists of a service element and a disability element. Both are exempt from income tax, but the exemption is narrower than most people assume.

CBDT Circular No. 13/2019 clarified that the exemption applies only to personnel who were invalided out of service on account of bodily disability attributable to or aggravated by military service. Someone who serves a full term, retires on superannuation, and is separately granted a disability element does not get the exemption on that basis.

If your pension payment order shows you were invalided out, the entire disability pension is exempt and should be reported as exempt income in your ITR, not as taxable pension. If you retired normally, your pension is taxable salary income like any other government pension.

Gallantry Awards and Family Pension

Two further exemptions survive in both the old and the new regime, because they sit outside the clauses that Section 115BAC disallows.

Section 10(18): pension received by a Central or State Government employee who has been awarded the Param Vir Chakra, Maha Vir Chakra, Vir Chakra or other notified gallantry award is fully exempt. Family pension received by a family member of such an individual is also fully exempt.

Section 10(19): family pension received by the widow, children or nominated heirs of a member of the armed forces (including paramilitary forces) is fully exempt where death occurred in the course of operational duty, in the circumstances and subject to the conditions in Rule 2BBA.

Ordinary family pension, where these conditions are not met, is taxable under "Income from Other Sources" with a deduction under Section 57(iia) of one-third of the pension or ₹15,000, whichever is lower, under the old regime. Under the new regime that deduction limit is ₹25,000.

Agniveers: Section 80CCH and Section 10(12C)

Agnipath recruits have their own dedicated provisions, and they work in both regimes.

• Section 80CCH(1): the Agniveer's own contribution to the Agniveer Corpus Fund is deductible from total income.
• Section 80CCH(2): the Central Government's matching contribution to the Fund is first included in salary and then allowed as a deduction, so it is effectively tax-neutral. This deduction is expressly available under the new regime.
• Section 10(12C): the lump sum received from the Agniveer Corpus Fund by an Agniveer or their nominee on completion of the engagement period is fully exempt, including the interest component.

This means the Seva Nidhi package does not create a tax liability in the year you exit.

Retirement Benefits for Government-Pattern Personnel

Defence personnel are government employees for the purposes of the retirement exemptions, which is more generous than the private-sector treatment:

One trap worth knowing: for provident funds where the employer does not contribute, such as DSOP and GPF, interest on your own contributions above ₹5,00,000 in a financial year is taxable. Officers making large voluntary DSOP subscriptions can cross that threshold without realising it, and the taxable interest shows up in the AIS. Our guide to retirement benefits and pension taxation works through each of these in more detail.

Arrears, OROP and Section 89 Relief

Pay commission arrears and OROP revisions are taxed in the year they are received, which can push you into a higher slab for a single year.

Section 89(1) relief lets you recompute the tax as if the arrears had been taxed in the years they related to, and claim the difference. You must file Form 10E on the e-filing portal before you file your ITR, otherwise the Assessing Officer will disallow the relief and issue an intimation demanding the tax back.

Which ITR Form and What to Check

Most serving personnel and pensioners file ITR-1 (Sahaj) if total income is up to ₹50 lakh from salary or pension, one house property and interest income. You need ITR-2 if you have capital gains beyond the ITR-1 limit, more than one house property, or foreign assets.

Before filing, check three things:

1. Form 16 against your pay slips. Pay offices sometimes apply the wrong exemption cap, or apply the old regime caps to someone who was defaulted into the new regime. 49Tax's AI reads your Form 16 and flags allowance exemptions that do not reconcile with the regime you are actually being taxed under.
2. AIS and Form 26AS. Pension credits, DSOP interest above the threshold, and bank interest all appear here and must match your return.
3. Exempt income reporting. Disability pension, gallantry award pension and Agniveer Corpus receipts belong in the exempt income schedule. Leaving them out entirely can look like unexplained credits when the department matches your bank inflows.

The Takeaway

Do not accept the default. Compute your tax both ways using your actual allowance mix for the year, claim Form 10E before filing if you received arrears, and make sure your pension payment order language matches how you are reporting your pension. Those three steps account for almost every rupee that defence taxpayers overpay or get a notice about.