16th Finance Commission Recommendations
States' Share in the Divisible Tax Pool
The 16th Finance Commission has retained the States' share in the divisible tax pool at 41% for the five years from 2026-27 to 2030-31. This decision was made despite 18 out of the 28 states advocating for an increase to 50%.
- The Commission noted that states already account for over two-thirds of the nation’s total non-debt revenues.
- Increasing the share further could constrain the Union government's fiscal space.
Horizontal Devolution Formula Adjustments
The formula now includes a new parameter: a state's GDP contribution, with a weightage of 10%, to recognize state efficiency and contribution to the country's GDP.
- Removal of the 2.5% weight for states’ tax efforts.
- Increase in the population share by 2.5 percentage points.
- Decrease in the weight of area, demographic performance, and per capita GSDP distance.
This has led to industrialized states like Gujarat, Maharashtra, Karnataka, Tamil Nadu, and Andhra Pradesh receiving an increased share.
Revenue Deficit Grants & Other Allocations
The Commission has recommended no revenue deficit grants, urging states to increase revenues and rationalize expenditures instead.
- No sector-specific or state-specific grants are recommended.
- Rs. 7.91 trillion earmarked for rural and urban local bodies with a 60:40 split and emphasis on infrastructure.
- Rs. 2.04 trillion recommended for State disaster response and mitigation funds.
Fiscal Responsibility and Reforms
- Recommended capping states’ fiscal deficits at 3% of GSDP.
- Union government’s fiscal deficit to be lowered to 3.5% of GDP by the end of the period.
- Complete discontinuation of off-budget borrowings by states.
- State fiscal responsibility laws to be amended for uniformity.
Transparency in Tax Devolution
The Commission recommended that the Union Government disclose data on net proceeds, certified by the Comptroller and Auditor General, to enhance transparency and trust in Union-State relations.
