The move will benefit an estimated 10 million government employees including nearly 60 lakh pensioners, starting from January 1, 2016. Among the defence services, 14 lakh serving officers and 18 lakh retired members will be covered.

Arrears will be paid within this year, said Finance Minister Arun Jaitley.

The last major hike in 2008 saw an average raise of nearly 50 percent. The auto and retail sectors gained in the stock market after today's announcement.

The increments - considerably smaller than past increases- will cost the government about one lakh crores or 15 billion dollars every year.

While this cost is a whopping 0.7 percent of India's GDP, the hike is the lowest in the last seven decades.

The new allowances and hikes were cleared by the cabinet today and are based on the recommendations of the Seventh Pay Commission - a government committee which reviews the pay of government employees nearly every decade.

Government workers also have been getting half-yearly and annual increments linked to prices. The new rules do away with 52 allowances and merge 36 others.

Under the new scheme, the maximum salary for a government servant will be about 2.5 lakhs a month, that's more than double the top-rung pay of Rs. 90,000 a month.

The least a government officer can now be paid is Rs. 18,000 a month, more than double the current compensation of Rs. 7,000 offered to the most junior employees.