Income tax act does not clearly mention about tax exemption on pension paid to disabled Armed Forces.
However, CBDT has given clarifications that disability pension received by armed forces is exempt from tax. Via Instruction No 136F.No. 34/3/68-IT(AI),dated the 14th Jan 1970, CBDT said that entire disability pension paid to officers of the Indian Army shall be exempt from tax.
Disability pension may sometimes comprise of a disability element as well as a service element; the department has clarified both such components are exempt from tax. (via F. No. 200/51/00-ITA-1 dt. 02.7.2001)
Also, no TDS should be deducted on disability pension paid to pensioners of the armed forces.