Personal Income Tax exemption for disability pension following change in degree

The Directorate General of Taxes (DGT) has issued a relevant ruling for taxpayers experiencing a change in their degree of permanent disability. The central issue lies in determining whether amounts initially received under the concept of total permanent disability (IPT) must be taxed as employment income when absolute disability is subsequently recognized.

What the DGT has resolved

The administration has confirmed that benefits for absolute permanent disability or severe invalidity enjoy an exemption from Personal Income Tax (IRPF). In the case analyzed, as the absolute disability was recognized with economic effects from November 2023, the exemption extends to the amounts that were initially received under the total permanent disability degree.

Consequently, the amount corresponding to the IPT for January 2024 should not be included as employment income in the 2024 tax return. Likewise, for amounts improperly received during the 2023 tax year, the taxpayer must proceed to rectify the self-assessment for that period.

What this means for you

If you have moved from a total permanent disability to an absolute disability or severe invalidity, the tax treatment of your benefits changes substantially. This implies that:

• Amounts received after the recognition of absolute disability are exempt from taxation.
• Amounts that have been withheld or included as employment income under the previous degree may be incorrect.
• There is an obligation to correct tax returns from previous years if the change in degree has retroactive effects.

What you should do

In the event of a change in the degree of disability, it is necessary to verify the date of economic effects of the new resolution. If the new degree grants tax exemption, it must be checked whether the amounts declared in previous years or in the current year comply with current regulations. If exempt amounts have been included as employment income, the rectification of the corresponding tax self-assessments should be considered in accordance with the General Tax Law.