A crackdown on prisoners who receive the disability support pension is expected to affect 2200 people a year.
Prisoners drawing disability pensions will only be able to have their payments suspended for 13 weeks - down from two years - before the benefits are cut off.
The new budget measure is expected to save $5.2 million over five years.
The government estimates 10 per cent of people - or 220 per year - will no longer be eligible for the payments after being re-tested following their release from prison.
Department officials confirmed people who spend more than 13 weeks on remand, but are ultimately found not guilty of crimes for which they were arrested, could still lose their disability payments.
The government argued the changes simply aligned the disability support pension to other welfare payments.
"It doesn't make it right," Greens senator Rachel Siewert said during a budget estimates hearing on Thursday.