Central government pension spending to rise by double digits in FY26

Pension bill to add to budget costs

The implementation of the Unified Pension Scheme by the central government from the next fiscal will likely increase the pension bill (excluding defence and railway pensions) by double-digits for the first time post-pandemic, according to a Moneycontrol analysis.

The government’s pension spending jumped 25.2 percent in FY21, as its pension bill had shot up from Rs 50,115 crore in FY20 to Rs 62,725 crore in the subsequent year.

The pension bill is likely to go up in low double digits, according to rough calculations, as the implementation of UPS will add another Rs 6,250 crore to spending.

The government has increased the size of its contribution to the pension corpus to 18.5 percent of employees’ salary from 14 percent earlier.

How much does the government spend on pensions?

Pensions of central government employees have risen at a compounded annual growth rate of 10.4 percent since FY10 when the pension bill was a mere Rs 17,850 crore, as per Budget documents.

But the increase in pension spending slowed down post pandemic.

The government is expected to spend Rs 79,241 crore on pensions in FY25, a 6.1 percent increase over the previous year. The average growth in pension spending has been 7.1 percent over the last three years.

The addition of Rs 6,250 crore by way of extra contribution for the pension corpus, along with a general increase in pension will push growth back to double digits in FY26.

“I would look at it merely as extension of salary bill. We tend to separate the two and then say pension adds to cost. We should treat the combined amount as employee cost. This will increase for sure. But a growing economy will generate commensurate taxes and other revenue which will compensate,” said Madan Sabnavis, chief economist, Bank of Baroda.

Where does the pension money go at present?

While a large proportion of pension spending is expected to go towards servicing pensions under the old pension scheme, which guarantees 50 percent of the last drawn salary as a pension, around 12 percent is spent as contributions to the pension corpus.

This is likely to go up further in FY26.

This is also likely to increase the share of pension spending in the total Budget, which was expected to decline to 1.64 percent of the Budget in FY25.

The contribution is likely to increase further as salaries increase with the implementation of the eighth pay commission, to be implemented from 2026, which shall further increase the outgo to corpus and the government’s pension bill.