8th Pay Commission implementation to tax relief: What Central Government Employees expect from Budget

The exact date for its setup has not been announced yet, but reports suggest that the 8th Pay Commission is likely to come into force on January 1, 2026.

The implementation of the 8th Pay Commission will result in a significant increase in the salaries of central government employees, along with a revision in the dearness allowance (DA). Though this is a welcome step, government employees are seeking certain other relief measures, especially regarding retirement benefits.

Modifications in Unified Pension Scheme

However, employee unions are still seeking changes in the UPS. Reports say that some employee unions are demanding for complete restoration of the OPS due to complexities in the UPS, though that looks unlikely. However, the Centre may announce some tweaks in the UPS in the upcoming Budget to make it more attractive for government employees.

For instance, the notified UPS guidelines say that if a central government employee opts for the Voluntary Retirement Scheme (VRS) before completing 25 years of service, the pension will only begin once the employee reaches the age of 60 and not from the date of VRS. This has raised concerns among employees over delays and gaps in pension payments. The employee union leaders are now demanding the government to reconsider this provision.

Commutation of pension

Pensioners are also demanding the Centre to look into their commuted pension restoration. Commutation of pension is the process of exchanging a portion of a pension for a lump sum amount. It allows pensioners to receive a one-time payment instead of receiving smaller amounts over time. A central government employee can commute a portion of pension, not exceeding 40% of the corpus, into a lump sum payment.

Currently, the government restores the commuted pension of a retired central government employee only after 15 years from the commutation date. Central government employee representatives have formally requested the Finance Minister to reduce the restoration period for the commuted portion to 12 years.

NPS in the new tax regime

In Union Budget 2024, the government had made changes to the NPS rules for employees selecting the new income-tax regime. The deduction limit for employer’s contributions to pension schemes under Section 80CCD (2) was increased to 14% of salary compared with 10% earlier for those who opted for the new regime.

Experts are now expecting the government to consider introducing further income tax benefits related to the NPS, both for government and private sector employees. These may include more flexible withdrawal regulations and increased tax exemption limits on investing in NPS.

Lower tax rates

Like all taxpayers, government employees are also hoping for lower tax rates to deal with rising living costs. Tax experts are calling for a complete revisit of the tax slabs under both the old and new regimes on account of the higher rate of inflation.

A key proposal is raising the basic tax exemption limit under the new regime to ₹10 lakh. This would mean that individuals earning up to ₹10 lakh annually wouldn’t have to pay any income tax if they opt for the new tax regime.

Analysts are also expecting the introduction of a new tax slab of 25% for individuals earning between ₹15 lakh and ₹20 lakh annually, who are currently taxed at 30%.