8th Pay Commission: How is hike in pension amount calculated? Check details

Many retired central government employees are waiting to see how the 8th Pay Commission will impact their pensions, now that the Centre has approved the commission’s Terms of Reference (ToR) and given an 18-month timeline for the report. Although pay commission discussions usually revolve around serving employees, pensioners outnumber them. As per the government’s Pensioners’ Portal, there were 68.72 lakh pensioners as of October 30 across civil, defence, telecommunications, railways and postal departments. By comparison, the number of central government employees stands at about 50 lakh.

Factors determining the hike

The size of the pension increase will largely depend on the fitment factor, the multiplier used to revise salaries and pensions under each pay commission. In the 7th Pay Commission, this factor was fixed at 2.57, resulting in basic pay being raised to 2.57 times the earlier amount under the 6th Pay Commission. The fitment factor for the 8th Pay Commission will only be confirmed after the Union Cabinet approves the commission’s recommendations.Manjeet Singh Patel, National President of the All India NPS Employees Federation, said that while everyone talks about the fitment factor, pensioners want other long-pending issues corrected as well.“A high fitment factor means a higher pension hike. But there are two key areas we want the government to fulfil. One is on commutation of salary. As per the current rules, if pensioners opt for a 40% pension commutation, they get reduced pension for 15 years. We want the government to reduce it to 12 years,” he told ET.He adds that medical support under CGHS remains inadequate in many places.“Plus, there are a lot of areas where CGHS hospitals are not available and pensioners get a fixed Rs 3,000/month for their medical benefits. We feel for an aged person, it’s a meagre amount and it should be increased to Rs 20,000. More hospitals at the district level should also be brought under the CGHS service,” Patel says.

How pensions will be recalculated

The fitment factor is a multiplier used when pay scales are revised. Under the 7th Pay Commission, it was 2.57, meaning basic pay increased 2.57 times.Ramachandran Krishnamoorthy, Director – Payroll Services, Nexdigm, explains that the same logic applies to pensions. For example, if the basic pay was Rs 10,000 earlier, in the 7th CPC matrix it became Rs 25,700 after applying the factor. A higher multiplier under the 8th CPC automatically pushes up pensions, according to ET.Illustration of basic pension changes:

In another example, if the existing basic pension is Rs 25,000 and the fitment factor becomes 2.0, the new basic pension becomes Rs 50,000: Rs 25,000 × 2 = Rs 50,000

Dearness relief, family pension and EPS also see automatic gains

Whenever the basic pension rises, Dearness Relief also increases because it is calculated as a percentage of the revised pension.

EPS, family pension and enhanced pension are similarly affected.For instance:

Family pension (typically 30% of pension for central government pensioners) also increases in line with the new basic.

Higher pension also means higher tax liability

Pension is treated as income from salary under the Income Tax Act. Once the 8th CPC increases the pension amount, the taxable income rises too.Before revision:

After revision (with higher fitment factor):

The fitment factor under the 8th Pay Commission will be decided once the Union Cabinet considers and clears the commission’s recommendations.