End Of 7th Pay Commission: 7 Things Employees And Pensioners Must Know

The 7th Central Pay Commission marked its last day on December 31. The recommendations that have been in place since January 1, 2016, have regulated the salaries, allowances, and pensions of over 1.2 crore central government employees and pensioners.

The commission has redefined the calculation of pay and retirement benefits over the decade. Although the termination of its tenure does not imply an immediate stop to the salaries or pensions, it officially completes one segment and moves to the next segment or cycle conducted by the 8th Central Pay Commission.

Here are the seven main lessons that elucidate the changes introduced by the 7th Pay Commission and what employees and pensioners ought to remember in the future.

The 7th Pay Commission Ends after 10 years

The structure of the 6th Pay Commission was changed to the 7th Pay Commission, and a new system of pay matrix was introduced. Its recommendations were to be applicable to the last ten years, which expired on December 31, 2025.

In this process, it impacted monthly wages, annual increases, allowances and pensions. The current pay structure will still prevail even after the tenure is over until new recommendations are passed and put into practice.

1. Massive Increase in Salary at all Levels

Among the most obvious changes was the rising basic pay of all levels. The minimum basic pay on entry to the job position was raised to Rs 18,000 as compared to Rs 7,000 per month. This was a significant increase in guaranteed wages to junior employees.

In the uppermost position in the pay matrix, the basic pay increased to Rs 2.5 lakh per month, as compared to approximately Rs 90,000 previously. The new matrix also made the levels of the organisation follow a uniform way and the salary increase more organised. Because allowances and pensions are pegged to basic pay, this change had a long-term effect on total earnings and benefits on a retirement basis.

2. The 2.57 Fitment Factor

Fitment factor of 2.57 was among the characteristics of the 7th Pay Commission.

This factor was applied to an employee's existing basic pay as of December 31, 2015, to arrive at the revised basic pay from January 2016. The same formula was used to revise pensions.

The commission allowed consistency in the pay revision through one multiplication factor across classes. This increased the total pay by a significant amount throughout the decade when coupled with allowances and periodic increases in dearness allowance, particularly to low- and middle-level workers.

3. Salaries Rebalanced with Allowances

In addition to the basic salary, the 7th pay commission looked into some of the allowances given to an individual, like the house rent allowance (HRA), transport allowance and other job-specific allowances.

Some were raised, others amalgamated, and others limited or rationalised. HRA, for example, was correlated with categories of cities and changed in case the dearness allowance exceeded some limit.

Due to this restructuring, the effect on take-home remuneration could not be exactly the same across the board based on the location of posting, department and entitlement to certain allowances. The structure of salary varied in most instances, even though the overall increase was relatively small.

4. Dearness Allowance Reset

Like other previous pay commissions, dearness allowance was also fixed at zero when the 7th Pay Commission assumed office in 2016.

Over the years, it has been increased periodically based on inflation trends. As of the end of the commission's tenure, dearness allowance stands at 58 per cent after the most recent hike.

It is the last revision of the dearness allowance according to the 7th Pay Commission. Dearness allowance is also important because several allowances and limits are revised upward once they cross defined thresholds.

5. Limit of Tax-Free Gratuity Increased

The tax-free limit on gratuity was raised during the later years of the period of the 7th Pay Commission.

When dearness allowance reached more than 50 per cent of basic pay, the government increased the maximum tax-free gratuity amount by increasing it from Rs 20 lakh to 25 lakh, effective from January 1, 2024.

This was after the rule that pay-linked limits and allowances should be increased by a quarter when dearness allowance attained the 50 per cent mark. The reform improved pension schemes of long-term employees.

6. Pension and NPS Related Changes

Other major modifications during the decade were policies related to pensions.

For employees covered under the National Pension System (NPS), the government increased its contribution from 10 per cent to 14 per cent of pay plus dearness allowance in 2019. This enhanced the retirement savings among those employees who joined the service after the old pension system was discontinued.

Investment flexibility under NPS was also expanded through options such as life-cycle funds and a wider choice of fund managers.

From April 1, 2025, an optional Unified Pension Scheme (UPS) was introduced for eligible central government employees under NPS, excluding armed forces personnel. The scheme is a combination of a contributory and assured pension scheme, and offers a minimum guaranteed pension, provided there are service conditions.

The 8th Pay Commission

As the term of the 7th Pay Commission comes to a close, the focus has shifted to the 8th Pay Commission, which has already been constituted.

It is anticipated that the new commission will give its report in the next 18 months. Its recommendations may require up to two years to be implemented, depending on government approval and budgetary considerations based on past timelines. Any revisions approved are usually carried out retrospectively from a given date.

Till then, the current pay and pension systems will be sustained.

For a full decade, the 7th Pay Commission shaped salaries, allowances and pensions of central government employees and pensioners. Its impact ranged from higher basic pay and revised allowances to improved gratuity limits and pension contributions.

Although its term came to an end yesterday, the transition of the next pay commission is just a beginning. The framework that is put in place will remain in effect until the next set of recommendations is implemented.