Veterans undergoing rehabilitation and full-time study will continue to receive higher welfare payments.
The scheme has been extended until July 2023 and will be backdated to cover the period since July 2022, when the arrangement expired.
The federal government also extended the eligibility of support packages to family members of working-age veterans and the requirement for veterans to have undertaken war-like service.
Veterans are eligible for incapacity payments as compensation for service-related physical or mental health conditions.
The payment typically wanes after 45 weeks but will continue at the full rate when a member is engaged in an approved rehabilitation program.
Full-time study can count as part of rehabilitation to help secure better employment outcomes post service.
Labor frontbencher Jenny McAllister said the government had heard harrowing accounts of hardship from defence force personnel and veterans.
"The Australian community has an expectation veterans and their families be well looked after," she told the Senate.
Nationals deputy leader Perin Davey added: "We know we haven't got the best record when it comes to supporting our veterans and we know we need to do better".
Greens senator David Shoebridge said the payments would enable veterans to get their life and career back on track.
"We've seen the scale of the injury suffered by veterans, too often psychological injuries, caused by some of the brutal conditions under which they served," he said.
The legislation passed the Senate on Wednesday after clearing the lower house at the start of September.
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