The Commission will now have time until December 31 to submit its report.
"The Cabinet approves extension of the term of the 7th Central Pay Commission by four months, that is up to December 31, 2015," an official spokesperson tweeted.
The pay panel, which was set up by the UPA government, was required to submit its report by August-end.
The government constitutes the Pay Commission almost every 10 years to revise the pay scale of its employees and often these are adopted by states after some modifications.
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The recommendations of the Seventh Pay Commission are scheduled to come into effect from January 1, 2016.
The Commission is headed by Justice A K Mathur. Meena Agarwal is secretary of the Commission.
The Sixth Pay Commission was implemented with effect from January 1, 2006, the fifth from January 1, 1996 and the fourth from January 1, 1986.