Union Budget to Factor in 16th Finance Commission Recommendations

Report Submitted Ahead of New Devolution Cycle​

The forthcoming Union Budget is set to incorporate the recommendations of the 16th Finance Commission, which has already submitted its report to President Droupadi Murmu. The recommendations are expected to guide the sharing of taxes between the Centre and states for the next five years starting 2026-27.

The Finance Commission, constituted under the Constitution, lays down the formula for tax devolution between the Union and the states. Cesses and surcharges levied by the Centre do not form part of the divisible pool.

Composition and Timeline of the 16th Finance Commission​

The 16th Finance Commission was constituted on December 31, 2023, and is headed by former NITI Aayog Vice Chairman Arvind Panagariya. Its members include retired bureaucrat Annie George Mathew, economist Manoj Panda, SBI Group Chief Economic Advisor Soumya Kanti Ghosh, and RBI Deputy Governor T Rabi Sankar. Ritvik Pandey serves as Secretary to the Commission.

The panel submitted its report to the President on November 17, 2025, and also presented copies to Prime Minister Narendra Modi and Union Finance Minister Nirmala Sitharaman.

Although the report has not yet been made public, past practice suggests that the Union Government generally accepts the recommendations of Finance Commissions.

Key Focus Areas Under the Terms of Reference​

Under its Terms of Reference, the 16th Finance Commission was tasked with making recommendations for a five year period beginning April 1, 2026. These include the distribution of net tax proceeds between the Centre and states, allocation of state-wise shares, grants-in-aid to states, and a review of financing arrangements for disaster management initiatives.

The formula for tax sharing for the period 2026-27 to 2030-31 will be a key point of attention once the report is released.

Context from the 15th Finance Commission​

The previous 15th Finance Commission, chaired by N K Singh, had recommended a 41 per cent share of the divisible tax pool for states. This applied for a six year period from 2020-21 to 2025-26, following an extension of its mandate.

The 41 per cent devolution accounted for territorial changes after the creation of the Union Territories of Jammu and Kashmir and Ladakh. The commission had assigned weights of 15 per cent to population, 15 per cent to area, 12.5 per cent to demographic performance, 10 per cent to forest cover and ecology, and 2.5 per cent to tax and fiscal efforts.

Evolution of Tax Devolution Norms​

Finance Commissions have historically determined states’ share in central taxes using a weighted formula that includes population, area, income distance, fiscal effort, demographic performance, and forest cover.

The 14th Finance Commission, led by former RBI Governor Y V Reddy, had raised tax devolution to 42 per cent of the divisible pool from 32 per cent recommended by the 13th Finance Commission. Its recommendations were applicable from April 1, 2015, to March 31, 2020.

Centre-State Tensions Over Devolution Criteria​

The issue of tax devolution has long been a point of contention between the Centre and several states, particularly those ruled by Opposition parties, which have argued that they have not received an equitable share. Southern states have also raised objections to the use of population as a key criterion, stating that it disadvantages states that have successfully controlled population growth.

As the Union Budget approaches, attention will remain focused on how the 16th Finance Commission’s recommendations shape the next phase of Centre-state fiscal relations.