16th Finance Commission Boosts Urban Local Bodies’ Share

Finance Minister Nirmala Sitharaman on February 1 tabled the 16th Finance Commission (FC) report in the Lok Sabha, laying down the framework for tax devolution between the Centre and the States for the next five years.

A key highlight of the report is a significant enhancement in funding for Urban Local Governments (ULGs). The Commission has recommended an allocation of ₹3.5 lakh crore to ULGs for the forthcoming five-year period. Typically, funds reach urban local bodies through grants transferred by the Centre and State governments.

Notably, the 16th FC has raised the share of local government grants earmarked for ULGs to 45%, up from 36% under the 15th Finance Commission. In absolute terms, the allocation to ULGs has been increased by nearly 230%, from ₹1.5 lakh crore during 2021–26 to about ₹2.56 lakh crore in the current award period.

Inter-state variations are significant. Kerala recorded the highest increase, with its allocation rising by over 400%, while Himachal Pradesh witnessed a decline of nearly 50% in funds earmarked for urban local bodies.

According to the report, over 60% of the grants to ULGs are basic grants. These include:

• Tied grants, which must be used for essential services such as sanitation and water supply, and
• Untied grants, which provide flexibility to address location-specific needs, though they cannot be used for salaries or establishment expenses.

The enhanced allocation reflects the Commission’s emphasis on strengthening urban governance and service delivery amid rapid urbanisation.