Eighth Pay Commission: The math behind the bonanza

Days after Diwali and just ahead of the Bihar elections, the Cabinet’s approval of the terms of reference of the 8th Pay Commission is set to come as good news for over 5 million central government employees and nearly 6 million pensioners, and is expected to give a boost to consumer demand over the next two years as well.

Under the Federal Cabinet decision on Tuesday, the Pay Commission will submit its recommendations within 18 months from the date of its formation, but the recommendations are likely to become effective from January 1, 2026.

This means the pay commission may submit its recommendations to the Center by April or May 2027, with little impact on the budget accounts for the next financial year.

As of March 1, 2026, the Center had about 3.7 lakh employees from 3.2 lakh in 2023. The salary bill (including wages, allowances and travel expenses) is estimated at Rs 3.6 lakh crore this fiscal from Rs 2.75 lakh crore in FY24. Pension payments are expected to rise to Rs 2.7 lakh crore in FY26.

The impact of the 8th Pay Commission on the government’s wage bill is likely to be huge, with previous estimates pegging the fiscal cost at around Rs 2-2.5 lakh crore although a portion of it will return to the exchequer in the form of tax revenues.

A report by institutional equity firm Kotak in July this year noted that previous Central Pay Commission reports had pegged the impact at between 0.6% to 0.8% of GDP. “The eighth CPC is likely to keep the financial cost at similar levels, translating to around Rs 2.4 to Rs 3.2 lakh of additional expenditure,” it noted.

QuantEco Research, in a report released in August, put the financial cost of the commission at an additional Rs 2 to Rs 2.5 lakh crore.

The Seventh Pay Commission was established in 2014 and its recommendations were for a period of 10 years from 1 January 2016 to 31 December 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 financial impact of Rs 18,500 crore.

Following the recommendations of the Central Pay Commission, most states have also set up pay commissions to review salaries and pensions of their employees, which will be done in the next two-three years.

In fact, the Committee is expected to take into account, among other things, in its report, the economic conditions in the country and the need for fiscal prudence as well as the potential impact on the finances of state governments.