8th Pay Commission: Why higher fitment factor could raise Centre’s NPS and UPS burden - Moneycontrol.com
India has roughly 55 lakh serving central government employees and an estimated 69 lakh pensioners who would be impacted by the recommendations of the 8th
India has roughly 55 lakh serving central government employees and an estimated 69 lakh pensioners who would be impacted by the recommendations of the 8th Central Pay Commission. Representative Image 8th Central Pay Commission to review pay for 50 lakh employees Fitment factor hike could add Rs 2 lakh crore to government costs Employees may get option to choose NPS or UPS at retirement Did our AI summary help? With the 8th Central Pay Commission set to review pay and pension structures for 50.14 lakh central government employees and around 69 lakh pensioners, questions are being raised over whether the government can accommodate the steep fitment factors sought by employee organisations. While employee unions have sought fitment factors, ranging from 3 to over 5, pension experts argue that such demands may not align with fiscal realities, especially given the government's growing obligations under the contributory pension schemes, including Pension System (NPS) and the Unified Pension Scheme (UPS). According to pension expert Manjeet Singh Patel, President of the All India NPS Employees Federation, the Central government's biggest challenge is not merely funding higher salaries but also meeting the associated increase in pension-related contributions. Realistic salary hike Singh argues that even if the government were to provide a fitment factor close to 2, the increase in overall salary outgo could still be substantial.
Considering an employee with a basic pay of Rs 100 who currently receives Rs 160 per month, after including 60 percent dearness allowance. When the basic pay is doubled to Rs 200 through a revised fitment factor, the employee's pay would rise by Rs 40 over the existing Rs 160, implying an effective increase of about 25 percent. This suggests that even a fitment factor that is significantly lower than the figures demanded by employee associations could result in a substantial increase in government expenditure. “It is estimated that the government will face over Rs 2 lakh crore burden,” Singh said. Government’s rising expenditure India has roughly 55 lakh serving central government employees and an estimated 69 lakh pensioners who would be impacted by the recommendations of the 8th Central Pay Commission. The 7th CPC raised the minimum basic salary pay of employees to Rs 18,000 per month. According to Singh, the challenge for the 8th CPC extends beyond salary revisions, as the Central government also contributes to retirement schemes for millions of employees. Besides increasing salaries, it would also raise contributions to pension schemes, which are linked to employees' basic pay and dearness allowance. He estimates that among serving central government employees, around 32-33 lakh are covered under the NPS, wherein they contribute 10 percent of their basic pay and DA, while the government contributes 14 percent.
The government is already contributing roughly Rs 3,000 crore every month to NPS accounts. For UPS employees, the government provides 18.5 percent contribution, which adds Rs 6,660 extra to the Rs 40,000 basic pay. “This means that for the 8th pay commission, the salary and pension hike are not the only important matters; besides this, the government has to bear the burden of 14 percent NPS and 18.5 percent UPS deduction liabilities for 55 lakh employees and 69 lakh pensioners. Which is a big share,” Singh asserted. NPS vs UPS: Which benefits more from higher fitment factor? The impact of the 8th CPC could differ significantly depending on whether an employee remains under NPS or opts for UPS. Singh illustrates this through a hypothetical example of an employee retiring after 20 years of employment, earning a current basic salary of Rs 80,000, DA of 60 percent, and a retirement corpus of Rs 50 lakh. He elaborates Under the NPS, a retiree can withdraw up to 60 percent of the accumulated corpus. Citing the above example, a retiree can withdraw up to Rs 30 lakh, while the remaining Rs 20 lakh must be used to purchase an annuity. The monthly pension received from the annuity depends on prevailing annuity rates. Depending on the annuity plan, pension payments may continue to the spouse after the subscriber's death, and the annuity purchase price may be returned to the nominees after the deaths of both the subscriber and the spouse.
Under UPS, the employee would be eligible for a one-time lump-sum benefit calculated as one-tenth of the last drawn emoluments (basic pay + DA) for every completed si month period of service. Since 20 years of service translates into 40 completed si month periods, the lump-sum payout would work out to Rs 5.12 lakh. Thus, his pension would be Rs 51,200 per month. As the DA rises, his pension increases, Singh explained. Instead, Singh suggests that the Central government should offer employees the option to choose between NPS and UPS at the time of their retirement or voluntary retirement. “At the time of their retirement, employees can carefully assess their financial position, health condition, life expectancy, and family circumstances before making an informed choice between NPS and UPS,” Singh said. Disclaimer: The views and investment tips expressed by experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.
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