It has been reported in the press that some banks were deducting tax from pension of disabled ex-servicemen in violation of Government instructions.

RBI was requested to have the matter investigated and remedial action taken. After examination, RBI discovered that in one specific instance, due to oversight, the pensioner's disability pension was wrongly taken into account while calculating Income Tax.

RBI has issued instructions to all agency banks to strictly adhere to the provisions of para 88.3 of Defence Pension Payment Instructions 2005, regarding exemption of Income Tax of the disability pension of the pensioners of Armed Forces. Banks have been advised to issue suitable instructions to all their pension disbursing branches that Income Tax should not be deducted from the disability pension paid to the pensioners of the Armed Forces.

Exemption of disability pension: banks instructed to stop deducting income tax from armed forces disability pensions. An inquiry found a wrongful income tax deduction from an armed forces pensioner's disability pension. The central banking authority directed all agency banks to follow para 88.3 of the Defence Pension Payment Instructions 2005 and instructed pension-disbursing branches not to deduct income tax from disability pensions paid to armed forces pensioners.