Why in news?

The government has approved the Terms of Reference (ToR) for the Eighth Central Pay Commission (CPC), paving the way for revised pay, pension, and allowances for about 50 lakh central government employees and 69 lakh pensioners, effective January 1 next year.

The Commission will be chaired by Justice Ranjana Prakash Desai, former Supreme Court judge and current Press Council of India chairperson.

Other members include IIM Bangalore Professor Pulak Ghosh (Part-time Member) and Petroleum Secretary Pankaj Jain (Member-Secretary).

What’s in Today’s Article?

• Understanding the Role of India’s Pay Commissions
• Mandate of the Eighth Central Pay Commission
• Timeline for the Eighth Central Pay Commission
• Key Factors That Will Decide the Pay and Pension Hike
• Fiscal Impact of the Eighth Pay Commission

Understanding the Role of India’s Pay Commissions

• The Pay Commission is set up by the central government roughly every 10 years to revise salaries and pensions of its employees.
• Since Independence, seven such commissions have been formed, with the Eighth Central Pay Commission announced in January this year.
• After consultations with ministries, state governments, and staff representatives, the terms of reference have been finalised.
• The Commission is expected to submit its recommendations within 18 months.

Mandate of the Eighth Central Pay Commission (CPC)

• The Eighth CPC has been tasked with reviewing pay, allowances, and pensions while ensuring fiscal prudence and adequate funds for development and welfare schemes.
• It will also assess the financial impact on state governments, which often adopt central recommendations, and compare salary structures and benefits in the public and private sectors.
• A key addition to this Commission’s Terms of Reference is to consider the unfunded cost of non-contributory pension schemes, in light of calls to restore the Old Pension Scheme (OPS).
  • The OPS offered 50% of the last drawn salary as pension to employees who joined before January 1, 2004.
  • Those joining later are covered under the National Pension System (NPS), which is market-linked.
  • To address growing concerns, the government last year launched the Unified Pension Scheme (UPS) — assuring a minimum pension of ₹10,000 for employees with at least 10 years of service, and full assured pension after 25 years of qualifying service.

Timeline for the Eighth Central Pay Commission

• The Eighth Central Pay Commission’s recommendations are expected to be announced in April 2027 but will be effective retrospectively from January 1, 2026.
• This means pay and pension hikes will apply from that date, with arrears paid upon implementation, while allowances will be revised prospectively.
• Historically, implementation has varied — employees waited 19 months after the Fifth Pay Commission and 32 months after the Sixth, while the Seventh Pay Commission was implemented within six months in January 2016.

Key Factors That Will Decide the Pay and Pension Hike

• The extent of salary and pension increases under the Eighth Central Pay Commission (CPC) will mainly depend on the fitment factor.
  • The fitment factor is a multiplier used when pay scales are revised.
  • In the Seventh Pay Commission, this factor was 2.57, meaning basic pay was raised to 2.57 times the previous level.
  • The new factor will be finalised after Cabinet approval of the Commission’s recommendations.
• According to experts, pensioners also want long-pending concerns addressed — such as reducing the pension commutation period from 15 years to 12 years, and improving medical benefits under the Central Government Health Scheme (CGHS).
• Currently, retirees in areas without CGHS hospitals receive only ₹3,000 per month for medical expenses — an amount pensioners want raised to ₹20,000, along with expanded hospital coverage at the district level.

Fiscal Impact of the Eighth Pay Commission

• The Eighth CPC is expected to significantly affect the government’s fiscal balance, as salaries, pensions, and allowances form a major part of revenue expenditure.
• In 2025–26, the Centre’s spending on these components is projected at over ₹7 lakh crore, nearly 18% of total revenue expenditure.
• The Seventh Pay Commission had earlier recommended a 23.55% hike, adding ₹1.02 lakh crore to the annual outgo.
• It also replaced the pay band and grade pay system with a pay matrix for different employee categories.
• The minimum monthly pay was raised from ₹7,000 to ₹18,000 for new recruits, and ₹56,100 for Class I officers.
• Based on past trends, the minimum pay under the Eighth CPC could exceed ₹46,000 per month.