Disability compensation for veterans is not subject to federal or state income tax. About 80 percent of veterans receive their VA benefits by direct deposit, which VA recommends for security reasons.

Veterans are rated at increments of 10 percent reflecting degree of disability. As federal regulations summarize the underlying principle, "The percentage ratings represent as far as can practicably be determined the average impairment in earning capacity resulting from such diseases and injuries and their residual conditions."

The largest category of veterans on the compensation scale is at 10 percent disability ($106 per month), with 791,000 veterans at this rate at the end of fiscal year 2003 among the total 2.5 million veterans receiving disability compensation.

The criteria for rating the severity of each disability are available online at www.access.gpo.gov/nara/cfr/waisidx_03/38cfr4_03.html .

As medical knowledge, laws and procedures change, VA regularly publishes proposed changes to these criteria in the "Federal Register" for public comment before a final regulation is adopted.

Where a veteran has more than one disability, the percentages are not added together to produce a new, overall rating. Instead, a formula described in federal regulations calculates the overall rating.

A veteran may be rated at zero percent, meaning there is evidence of the service connected condition, but it does not impair the veteran. An example is a minor scar. This zero percent rating, though not compensable, is beneficial, since it raises the veteran's priority in other VA programs, and it may be reviewed for a higher rating if the condition worsens.

A veteran may have a number of disabilities individually evaluated as 0 percent which produce 10 percent combined disability and entitle the veteran to disability compensation. At the end of fiscal year 2003, there were 16,000 veterans in this category of "compensable zero" ratings.

In addition to the 2.5 million veterans on the compensation rolls, past studies have shown approximately 1.2 million veterans have overall ratings of 0 percent, but because they do not receive payments from VA, the exact number is not known.

The largest category of service-connected disabilities is musculoskeletal problems, accounting for 40 percent of all disabilities. This includes such problems as impairment of the knee and arthritis due to trauma. Data on the number and type of disabilities are published annually at www.vba.va.gov/reports.htm .

A proposed cost-of-living increase is included in the President's budget proposal released early each calendar year. It is part of the spending forecast and appropriations request for the ensuing fiscal year, a starting point for legislative discussion. However, the actual percentage increase is set through a separate bill debated by Congress and usually signed into law the following fall.

Legislators are not bound by any specific annual Consumer Price Index formula for COLA, but historically have chosen to mirror the percentage given to Social Security recipients. The Social Security increase, in turn, is based on a Bureau of Labor Statistics calculation of the rise in the consumer price index for urban wage earners and clerical workers (CPI-W).

Cost of living adjustments become effective December 1 each year and are reflected in the payment received by veterans on or about he first day of the new year. Whenever a payment falls on a holiday or weekend, as is the case with the Jan. 1 payment each year, that month's payment is issued the last prior business day.