The recommendations of the new Pay Commission, which will be constituted shortly, will be implemented from January 1, 2016.
"Prime Minister Manmohan Singh approved the constitution of the 7th Pay Commission. Its recommendations are likely to be implemented with effect from January 1, 2016", Finance Minister P Chidambaram said in a statement.
The Congress and the employees union hailed the decision of the UPA-II government.
The union, however, demanded that the pay panel's award be implemented with retrospective effect from January 1, 2011.
Commerce and Industry Minister Anand Sharma said: "It is the right of the employees to have Pay Commission ...when the recommendations come, the government will be able to implement (it). You do not do something for which you do not have money available."
The setting up of the Commission, whose recommendations will benefit about 50 lakh central government employees, including those in defence and railways, and about 30 lakh pensioners, comes ahead of the Assembly elections in 5 states including Delhi, Rajasthan and Madhya Pradesh in November and the general elections next year.
The government constitutes Pay Commission almost once in every ten years to revise the pay scales of its employees and often these are adopted by states after some modification.
As the Commission takes about two years to prepare its recommendations, the award of the seventh pay panel is likely to be implemented from January 1, 2016, Chidambaram said.
The sixth Pay Commission was implemented from January 1, 2006, the fifth one from January 1, 1996, and the fourth from January 1, 1986.
"Except for 6th Pay Commission, all Pay commissions are set up in 3rd year of a decade....The government should attract best of talents as its employees.
Pay Commissions help in attracting and also retaining best available talents," Congress general secretary in-charge for Communication Ajay Maken commented on the microblogging site Twitter.
He further said, "the NDA rejected the legitimate formation of 6th Pay Commission in 2003. Congress set up the 6th Pay Commission in 2005, now again the 7th CPC in 2013."
Even while welcoming the announcement, President of Confederation of Central Government Employees and Workers, K K N Kutty, said "we have a reservation. It should be implemented with effect from January 1, 2011 as in the case of Central PSUs whose employee pay scales are revised every five years."
During the discussions with the government, Kutty said, the Confederation would press for merger of up to 50 per cent of dearness allowance with the basic pay, which is a prerequisite for setting up a pay commission.
The merger of DA with basic pay helps central government employees as certain allowances are paid as proportion of the basic pay and hence merger results in higher allowances.
Commenting on the decision, ICRA senior economist Aditi Nayar said, "it should be viewed in the light of the recommendation of the 13th Finance Commission that structural shocks like arrears related to Pay Commission awards should be avoided and the award should commence from the day of acceptance."
New pay commission is outcome of election force: Maira
Constitution of the 7th Pay Commission is an "election force", Planning Commission member Arun Maira said today.
"All government employees will want it while others may not... This is a big election force," Maira said on the sidelines of a FICCI organised seminar on India's Regulatory Framework here.
"It is an interesting situation since it is election time," he said when asked about the timing for it.
"You need to get elected otherwise you cannot do what you want to do," he added.
The recommendations of the Commission will benefit about 50 lakh central government employees, including those in defence and railways, and about 30 lakh pensioners, coming ahead of the assembly elections in five states in November and the general elections next year.