Eighth Pay Commission: The math behind the bonanza

Coming days after Diwali and just ahead of the Bihar elections, the Cabinet approval of the terms of reference for the Eighth Pay Commission is set to be good news for over 5 million central government employees and nearly 6 million pensioners and is expected to give a boost to consumption demand over the next two years as well.

As per the decision of the Union Cabinet on Tuesday, the pay commission will make its recommendations within 18 months of the date of its constitution, but the recommendations are likely to be effective from January 1, 2026.

This would mean that the Pay Commission may submit its recommendations to the Centre by April or May 2027, having little impact on the Budget math for the next fiscal.

As on March 1, 2026, the Centre had about 3.7 million employees from 3.2 million in 2023. Its salary bill (inclusive of pay, allowances and travel expenses) is estimated to be Rs 3.6 lakh crore this fiscal from Rs 2.75 lakh crore in FY24. Pension payments are estimated to rise to Rs 2.7 lakh crore in FY26.

The impact of the Eighth Pay Commission on the government’s wage bill is likely to be hefty with previous estimates pegging the fiscal cost at around Rs 2–2.5 lakh crore though some part of it will come back to the Exchequer in the form of tax revenues.

A report by Kotak Institutional Equities in July this year had noted that past Central Pay Commission (CPC) reports have pegged the impact at 0.6-0.8% of GDP. “The Eighth CPC will likely keep the fiscal cost capped at similar levels, translating to around Rs2.4-3.2 lakh crore of additional expenditure,” it had noted.

QuantEco Research, in a report in August, had pegged the fiscal cost of the commission at an incremental Rs 2 to Rs 2.5 lakh crore.

The Seventh Pay Commission was set up in 2014 and its recommendations were for the 10-year period from January 1, 2016, to December 31, 2025 with a 14.3% increase in real pay. Previously, the Sixth Pay Commission had a financial impact of Rs 22,000 crore, while the Fifth Pay Commission had a fiscal impact of Rs 18,500 crore.

Following the Central Pay Commission recommendations, most states also set up pay panels to revise the salaries and pensions of their own employees, which will take place over the next two to three years.

In fact, for its report, the Commission is expected to keep in view, among others, the economic conditions in the country and the need for fiscal prudence as well as the likely impact on the finances of state governments.