8th Pay Commission Big Clarity: No Merger Of 58% Dearness Allowance With Basic Pay; Impact On Salary, Pensions

8th Pay Commission Update: The Finance Ministry has finally cleared the fog around the merger of dearness allowance with basic salary under the 8th Pay Commission. In a written reply in Lok Sabha, the government clarified that there is no proposal regarding the merger of existing DA with basic salary that will be decided for the 8th CPC. The current DA is 58%, and there was a growing demand to merge it with the basic salary.

8th Pay Commission-DA Merger:

The Ministry of Finance was inquired about whether the government has issued notification for the constitution of 8th Central Pay Commission recently.

Also, the ministry was asked whether the government proposes to merge the existing DA/DR with basic pay as an immediate relief measure for Central Government employees/pensioners who are facing unprecedented inflation during the last 30 years since the DA/DR given to these employees is not in consonance with the real-time retail inflation.

The Minister of State in the Ministry Of Finance, Pankaj Chaudhary, replied to the queries in Lok Sabha. In his written reply, Chaudhary said, "No proposal regarding merger of the existing Dearness Allowance with the Basic Pay is under consideration with the Government at present. ln order to adjust the cost of living and to protect Basic Pay Pension from erosion in real value on account of inflation, the rates of DA,/DR are revised periodically every 6 months on the basis of All lndia Consumer Price lndex for lndustrial Workers (AlCPl-lW) released by Labour Bureau, Ministry of Labour and Employment."

Dearness Allowance:

Just before Diwali, in October this year, the government approved to release an additional instalment of Dearness Allowance (DA) to Central Government employees and Dearness Relief (DR) to pensioners with effect from July 1, 2025, representing an increase of 3% over the existing rate of 55% of the Basic Pay/Pension, to compensate against price rise. Hence, the dearness allowance was hiked to 58%.

The combined impact on the exchequer on account of increase in both Dearness Allowance and Dearness Relief would be Rs 10,083.96 crore per annum.

Generally, the government hikes dearness allowance twice every year for a six-month period from January to June and July to December of the year. The revision in the DA hike is to adjust the cost of living of employees and retirees against the inflation rate.

Dearness allowance is like an incentive paid by the government to its employees and pensioners as a move to enhance the cost of living of these personnel and retirees against inflation. DA is calculated as a percentage of the basic salary, and hence, it would vary from employee to employee. All central government employees and pensioners receive DA on their basic salary.

Many trade unions and employee representatives had demanded that the government merge 50% of the DA with basic pay. However, the implementation of the 8th Pay Commission is expected to be delayed to 2027, and hence, these representatives demanded that an early merger of DA with basic pay could increase the salaries for employees and the future calculation of DA could be based upon the revised Pay scale.

8th Pay Commission Implementation Date:

The Cabinet recently announced a temporary body, Terms of Reference (ToR), for the 8th CPC. The ToR is tasked with recommendations for the 8th Pay Commission. They are given an 18-month timeframe to submit the recommendations. ToR may consider, if necessary, sending interim reports on any of the matters as and when the recommendations are finalized.

Hence, 8th Pay Commission is not expected to be implemented on January 1, 2026. The 7th Pay Commission is ending on December 31, 2025. For the past four decades, the timeline to constitute every new pay commission was once in 10 years, and the recommendations get effective after the same cycle. The new pay commission has been effective from January 1st during the 4th to 7th Pay Commission.

8th Pay Commission Fitment Factor:

There are many recommendations for the 8th CPC. But the crucial component is the fitment factor, which is used to calculate the new salaries and pensions for the employees. As per Kotak Institutional Equities and Ambit Capital estimates, the fitment factor could range between 1.8 to 2.46. While some predict that the fitment factor could be at 2.57, which is the same as 7th Pay Commission.

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