16th Finance Commission Report

Union Finance Minister Nirmala Sitharaman, in her Union Budget 2026 speech on February 1, 2026, announced that the Central Government has accepted the recommendations of the Sixteenth Finance Commission (16th FC). The Commission has recommended continuation of 41% vertical devolution of the divisible tax pool to States, a formula that has been in place since 2021.

₹1.4 Lakh Crore Finance Commission Grants for States

As per the recommendations, the Centre has allocated ₹1.4 lakh crore to States for FY 2026–27 as Finance Commission Grants. These include:

• Rural Local Body Grants
• Urban Local Body Grants
• Disaster Management Grants

About the 16th Finance Commission

• Constituted (Under Article 280 of Constitution of India): December 31, 2023
• Chairman: Dr. Arvind Panagariya, former Vice-Chairman of NITI Aayog
• Award Period: April 1, 2026 to March 31, 2031
• Report Submitted: November 17, 2025
• Report Tabled in Parliament: December 1, 2026

The Commission stated that there was no further fiscal space to reduce the States’ share in the divisible pool, as the Centre’s increasing reliance on cesses and surcharges (which are not shareable with States) has reduced the size of the divisible pool from 89.1% of gross tax revenues in 2014–15 to about 74–80% during 2020–24.

Vertical devolution: While retaining the 41% vertical devolution, the 16th FC has modified the horizontal devolution formula used to distribute this share among States.

Horizontal Devolution–Revised Weightages:

• Per Capita GSDP Distance: 42.5% (down from 45%)
• Population: 17.5% (up from 15%)
• Demographic Performance: 10% (down from 12.5%)
• Area: 10% (down from 15%)
• Forest Cover: 10% (unchanged)
• Contribution to GDP: 10% (new criterion)

The earlier ‘tax and fiscal efforts’ criterion (2.5%) has been replaced by ‘contribution to GDP’, significantly altering inter-State shares.

Southern States Gain from New Formula

Under the revised formula, all five Southern States have recorded an increase in their share of tax devolution:

• Andhra Pradesh: 4.217% (from 4.047%)
• Karnataka: 4.131% (from 3.647%)
• Kerala: 2.382% (from 1.925%)
• Tamil Nadu: 4.097% (from 4.079%)
• Telangana: 2.174% (from 2.102%)

Shares of Uttar Pradesh and Bihar Decline

India’s two most populous States, which also receive the largest shares of tax devolution, have seen marginal reductions:

• Uttar Pradesh: 17.619% (from 17.939%)
• Bihar: 9.948% (from 10.058%)