16th Finance Commission Maintains States’ Tax Share at 41%
Panel emphasizes fiscal discipline, transparency, and performance linked grants for states and local bodies
NEW DELHI, Feb 2: The 16th Finance Commission has recommended retaining states’ share in the divisible tax pool at 41% for the five year period starting April 1, 2026, while ending the revenue deficit grant for the first time.
Chaired by Arvind Panagariya, the commission noted that most states have room to enhance revenues and rationalize expenditures. It introduced states’ contribution to GDP as a criterion for horizontal devolution and urged stricter fiscal discipline, including mandatory disclosure of net proceeds of Union taxes and off budget borrowings.
The report marks a shift from entitlement-based transfers to compliance-driven fiscal federalism. Disaster grants have been enhanced, and the commission mandated timely fund transfers to local governments, with penalties for delays.
For horizontal devolution, 15.5% weightage is assigned to population (2011 census), 10% each to demographic performance, area, and forest cover, 42.5% to per-capita income distance, and the remainder to states’ GDP contribution. The Centre has accepted recommendations on vertical and horizontal devolution and will examine the revenue deficit grant proposal.
A total of Rs 7.91 lakh crore in grants has been earmarked for rural and urban local bodies, with 60% for rural and 40% for urban areas. Twenty per cent of the grants will be performance linked, tied to sanitation, solid waste management, and water services. Urbanisation incentives of ₹10,000 crore are proposed for merging peri urban villages into larger urban local bodies, along with a ₹56,100-crore special infrastructure window for wastewater management.
The commission has set a 3% GSDP cap on states’ fiscal deficits, recommended discontinuation of off-budget borrowings, and called for amendments to state fiscal responsibility laws. For disaster management, a corpus of ₹2.04 lakh crore is proposed over five years, with an 80:20 split between response and mitigation, and separate allocations of ₹79,406 crore for the National Disaster Response and Mitigation Funds. States will need to upload validated data on the National Disaster Management Information System portal to access these grants from 2027–28.
