Here's how 8th Pay Commission will impact salary, pension and allowances

8th pay commission

The Centre has approved the terms of reference (ToR) of the 8th Pay Commission that will recommend a revision in pay and benefits for its employees and pensioners to ensure fair compensation in retrospect with inflation and economic changes.

ToR is like the official rulebook and scope of work for the commission, which will study the current pay structure, compare it with economic realities and recommend changes in salary, pension, allowances and service conditions.

Besides examining the minimum pay structure, allowance and other benefits, the body is likely to revise the fitment factor, which has been instrumental in introducing uniform revision of basic pay scales across all central government employees.

Here are the factors that will determine the hike in basic pay, its effect on dearness allowance, dearness relief, and other allowances when the 8th Pay Commission is implemented.

Benefits of high fitment factor on basic salary and pension

A fitment factor will affect the basic pay amount received by central government employees or pensioners as per their level (Group A, B, C, and D) in the pay matrix. The basic pay is one of the main components under earnings in a salary structure.

The 7th Pay Commission fixed basic pay multiplier at 2.57,  following which an employee or a pensioner getting a basic salary of Rs 15,000 saw an increase to Rs 38,550 (Rs 15,000 x 2.57). If the 8th Pay Commission decides to increase the fitment factor by 3, for instance, the new basic pay will increase to Rs 45,000 (Rs 15,000 x 3).

The fitment factor has evolved over the years since its implementation by the 4th Pay Commission in 1986. The 7th Pay Commission hiked the fitment factor to 2.57 in 2016, 1.86 in the 6th Pay Commission in 2006, while the 5th Pay Commission added 40 percent on the basic pay amount.

The 8th Pay Commission recommendations are expected to come into effect from January 1, 2026, in line with the ten-year revision cycle followed. This decision directly impacts more than 50 lakh central government employees and more than 70 lakh pensioners.

How will dearness allowance (DA) and dearness relief (DR) increase

Dearness allowance (DA) for employees or dearness relief (DR) for pensioners is a mandatory component of a salary and pension. An increase in the basic pay will automatically raise the DA or DR, as such allowances are calculated as a percentage of last-drawn basic pay.

The finance ministry increased the DA to 58 percent from 55 percent of the basic pay on July 1, 2025. However, the DA and DR will reset to zero when the 8th Pay Commission commences, and will gradually increase twice a year based on the All-India Consumer Price Index (AICPI) to compensate its pensioners.

This means, before the 7th Central Pay Commission ends, the existing basic pay plus 58 percent DA will be merged. After the fitment factor is added to the new basic pay with the implementation of the 8th CPC, DA will again rest to zero.

For instance, if the new basic pay is hiked to Rs 45,000 adding the fitment factor of the 8th CPC, and the government after the DA reset to zero decides to gradually increase it by 5 percent, 10 percent, 15 percent, and 20 percent in the next two years, the DA or DR will have increased by Rs 2,250, Rs 4,500, Rs 6,750, and Rs 9,000, respectively.

Other allowances

When the basic pay is increased, allowances such as house rent allowance (HRA), a standard component of salary, will also go up, as it is calculated as a percentage of a basic pay. However, the rate of increment varies for other allowances such as transport allowance, which is a fixed amount and revised separately from the basic pay. Similarly, the overtime allowance is calculated on hourly time rate fixed by the department of expenditure.

According to a government release, the implementation of 7th Pay Commission in 2016 abolished 51 allowances and 37 allowances were absorbed after it examined a total of 196 allowances, and fixed the pay at existing rates. From time to time, government issues orders on providing specific allowances for central government employees based on factors, including pay matrices, location, job requirements, geography, or duties and responsibilities.

While employees cheer the news of 8th Pay Commission, it is equally important to understand income tax obligation as higher income means higher tax liability. Experts suggest diversifying investment and planning to prepare for difficult times to avoid a personal finance crisis.