Modi government's pension expenditure to surge by double-digits in FY26
The Indian government's pension expenditure (excluding defense and railways) is projected to witness a double-digit increase in the fiscal year 2026. This rise is attributed to the implementation of the Unified Pension Scheme (UPS), as per an analysis by Moneycontrol. The UPS, set to be introduced next fiscal year, will add an estimated ₹6,250 crore to the government's pension spending.
Government increases contribution to corpus
The government has raised its contribution to the pension corpus from 14% to 18.5% of an employee's salary. This increase is part of the changes brought about by the UPS implementation. Since FY10, pensions for central government employees have grown at a compounded annual growth rate of 10.4%, as per budget documents.
Pension spending growth slowed post-pandemic
The growth in pension spending experienced a slowdown following the pandemic. For FY25, the government is projected to spend ₹79,241 crore on pensions, marking a 6.1% increase from the previous year. Over the past three years, average growth in pension spending has been 7.1%. However, this rate is tipped to return to double digits in FY26 due to additional contributions and general increases in pensions.
Pension spending's impact on budget and employee cost
The majority of pension spending is anticipated to service pensions under the old scheme, which assures 50% of the final drawn salary as a pension. Approximately 12% is allocated as contributions to the pension corpus, a figure expected to rise further in FY26. This rise will also affect the share of pension spending in the total budget, which was projected to fall to 1.64% in FY25.
Eighth Pay Commission to further increase pension bill
The implementation of the Eighth Pay Commission from 2026 is expected to further increase salaries, leading to a higher contribution toward the corpus and an increased government pension bill. Madan Sabnavis, Chief Economist at Bank of Baroda, views this as an extension of the salary bill and believes that a growing economy will generate adequate taxes and other revenue to compensate for these costs.
