A tax-free form of compensation paid to members of the armed forces who are on active duty in a designated combat zone or hazardous duty area. Combat pay includes active duty pay, dislocation allowances, reenlistment bonuses, achievement awards, pay for accrued leave and other miscellaneous types of compensation that are paid as a result of military service.

Military personnel who serve in a combat or hazardous duty zone for any time during the month will receive tax-free combat pay for that entire month. If they are hospitalized as a result of injury or illness of any kind that was received in one of these zones, then their pay received during convalescence will be excluded.