Eighth Pay Commission terms of reference approved: What this means, likely impact on salaries, pensions of govt employees

Pay Commission’s role in India

A Pay Commission is constituted by the central government approximately every decade to revise the salary structure of its employees and determine pension payments. Since 1947, seven Pay Commissions have been established. The government had announced the formation of the Eighth Central Pay Commission in January this year to examine and recommend changes in the salaries and other benefits of central government employees.

The terms of reference have been finalised after consultations with various ministries, state governments and staff side of the Joint Consultative Machinery. The Commission will submit its recommendations within 18 months.

The mandate

As per the Terms of Reference, the Eighth Pay Commission will have to keep in view the economic conditions in the country and the need for fiscal prudence, the need to ensure that adequate resources are available for developmental expenditure and welfare measures.

It will also take into consideration the likely impact of the recommendations on state government finances, as states usually adopt the recommendations with some modifications, and the prevailing emolument structure, benefits, and working conditions available to employees of Central public sector undertakings and the private sector.

While these ToR are same as the Sevnth Pay Commission, one additional term has been added this time — to keep in view the unfunded cost of non-contributory pension schemes. This is significant in the backdrop of continuing demands for restoration of the Old Pension Scheme — an unfunded, non-contributory scheme, under which government employees hired before January 1, 2004 used to get defined benefits post retirement, with 50 per cent of their last drawn salary as monthly pension.

Under the National Pension System, which covers employees who joined service post January 2004, contributions are defined but benefits depend on the market. Last year, the government announced a revamped pension scheme — Unified Pension Scheme — having defined assured pension, family pension and a minimum pension for those with less than the mandatory service for full pension. The UPS has an assured payout of Rs 10,000 for employees superannuating after qualifying service of 10 years and “full assured payout” after a minimum 25 years of qualifying service.

The timeline

The Eighth Central Pay Commission recommendations are expected to be announced in April 2027. They will, however, be effective from January 1, 2026, implying that the pay and pension hikes are likely to be implemented retrospectively from that date, with arrears being paid when the recommendations take effect. Allowances, however, are likely to be revised prospectively.

The Commission’s recommendations take some time to come into effect after the due date. For instance, the employees had to wait for 19 months for the implementation of the Fifth Pay Commission’s recommendations, and for 32 months at the time of implementation of Sixth Pay Commission’s recommendations. The Seventh Pay Commission’s recommendations were implemented in January 2016, within six months from the due date.

The fiscal implications

Pay Commission recommendations have an impact on the fiscal math of the government as salaries to employees constitute a major chunk of its revenue expenditure. The Central government’s outgo on pay, pension and allowances is estimated at over Rs 7 lakh crore in 2025-26, which is around 18 per cent of the revenue expenditure.

The previous Seventh Central Pay Commission had recommended a 23.55 per cent increase in pay, allowances and pension, which had led to an additional annual outgo of Rs 1.02 lakh crore for the central government.

The system of pay bands and grade pay was replaced with a pay matrix, with separate pay matrices for civilians, defence personnel and for military nursing service. The minimum pay, of a newly recruited employee at the lowest level, was increased from Rs 7,000 to 18,000 per month, whereas for a freshly recruited Class I officer, it was fixed at Rs 56,100. Going by the quantum of pay hikes seen in the last round, the minimum pay under Eighth Central Pay Commission could rise to over Rs 46,000.