Labor has dumped plans for a $5,000 cap on veterans' allied health payments as part of its "solemn obligation" to ex-serving personnel.
Following sustained criticism and campaigning from advocates, Veterans' Affairs Minister Matt Keogh announced on Thursday the government had backed down on the measure.
In a bid to improve the budget's bottom line, the government introduced a $5,000 annual limit on allied health services for veterans which was originally set to come into effect from July 2027.
The proposal attracted condemnation, with the coalition, Greens and crossbench all calling for Labor to dump the cap.
Keogh said the government took its "solemn obligation" to veterans seriously.
Keogh has faced calls in recent weeks to resign after he at first declined to meet with advocates over the cap.
The government was criticised after the parents of Cameron Baird were told their travel allowance would be cut.
Fair Care for Veterans spokesperson John Armfield, a former Navy clearance diver, thanked Mr Keogh for dumping the cap.
"The minister says he wants to keep talking to veterans and providers."
Tasmanian senator Jacqui Lambie, alongside Greens senator David Shoebridge, successfully passed a bill in the upper house to stop any future cap being imposed on health payments.
Lambie hailed the win.
Shoebridge said there had been a "pile on" Keogh, who had to deliver a three quarter of a billion dollar saving in his portfolio.