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The Union Government’s approval of the Terms of Reference (ToR) for the Eighth Central Pay Commission (CPC) formally initiates the process of revising pay, pensions, and allowances for nearly 50 lakh central employees and 69 lakh pensioners.

The Commission, chaired by Justice Ranjana Prakash Desai, with Pulak Ghosh as Part-time Member and Pankaj Jain as Member-Secretary, is expected to submit its report within 18 months, with recommendations effective from 1 January 2026.

Background: Evolution of Pay Commissions in India

• Pay Commissions are constituted approximately every ten years to rationalise pay structures.
• Since Independence, seven Commissions have been established.
• Their role has evolved from simple pay revision to addressing fiscal sustainability, equity across services, and alignment with economic conditions.
• The 8th CPC, announced in January 2025, continues this trend of expanding scope.

Mandate and Terms of Reference of the 8th CPC

a. Core Functions

• Review pay, allowances, and pensions of Central Government employees.
• Ensure recommendations maintain a balance between employee welfare and fiscal prudence.

b. Fiscal and Federal Considerations

• Assess impact on state governments, which often adopt Central pay structures.
• Review public-private salary differentials to ensure competitiveness in government employment.

c. Pension-Related Mandates

• Examine the unfunded liabilities of the Old Pension Scheme (OPS) amid growing demand for its restoration.
• Consider long-standing issues such as:
  • Reducing pension commutation period from 15 to 12 years.
  • Enhancing medical benefits under CGHS, especially raising the current ?3,000 monthly allowance in non-CGHS areas and expanding district-level hospital coverage.

d. Integration with New Pension Reforms

• Evaluate implications of the National Pension System (NPS).
• Consider overlaps with the Unified Pension Scheme (UPS), introduced to address concerns of volatility and provide a minimum pension of ?10,000 after 10 years of service.

Fitment Factor: The Core Determinant of Pay Revision

The fitment factor, a multiplier used to revise basic pay and pensions, will be central to the scale of salary and pension increases.

• Under the 7th CPC, this factor was 2.57.
• A higher factor under the 8th CPC would proportionately raise:
  • Basic pension
  • Dearness Relief (DR)
  • Family pension
  • EPS benefits

Illustration (for ?40,000 old basic pay):

• Fitment factor 2.57 → ?1,02,800 revised pay → ?51,400 pension
• Fitment factor 3.00 → ?1,20,000 revised pay → ?60,000 pension
• Fitment factor 3.68 → ?1,47,200 revised pay → ?73,600 pension

Higher pension also increases tax liability, as pension is treated as taxable salary income.

Fiscal Implications for the Government

• Pay, pensions, and allowances account for ~18% of the Centre’s revenue expenditure.
• Projected outlay for 2025-26 exceeds ?7 lakh crore.
• The 7th CPC caused a 23.55% rise in expenditure, adding ?1.02 lakh crore annually.
• Under the 8th CPC, the minimum pay could exceed ?46,000 per month, increasing the fiscal burden significantly.

Conclusion

The 8th CPC will influence not only the remuneration of millions of employees and pensioners but also the broader macro-fiscal landscape. Balancing competing demands—employee welfare, equity, fiscal discipline, and federal financial capacity—will determine the long-term sustainability of government pay and pension structures. Its recommendations will therefore play a crucial role in shaping public administration, fiscal governance, and the future of India’s personnel systems.