India's Sixteenth Finance Commission Kept the States' Share of Central Taxes at 41 Per Cent for 2026 to 2031 and Gave 10 Per Cent of the Split Between States to a New Test, Each State's Contribution to GDP

For each of the five years from 1 April 2026, the states of India will receive 41 paise of every rupee in the Union’s divisible pool of taxes. That is the share the Sixteenth Finance Commission recommended, and the Government accepted, and it is the same share as in the period before. The Receipt Budget for 2026-27 estimates the states’ share at Rs 15,26,255 crore, against estimated gross tax revenue of Rs 44,04,086 crore.

The Commission, chaired by Arvind Panagariya (the report names him as Chairman), submitted its report to the President on 17 November 2025. Parliament received the two-volume report under Article 281 together with the Government’s Explanatory Memorandum as to the Action Taken, signed on 1 February 2026, the day the Union Budget was presented. Our piece on how the Budget is passed covers that day’s other papers.

What the Constitution asks a Finance Commission to do

Article 280 tells the President to set up a Finance Commission within two years of the Constitution starting and then at the end of every fifth year, or earlier if needed. It has a chairman and four other members, all appointed by the President. The Sixteenth is the sixteenth since 1951, the report says. It was constituted on 31 December 2023 and was due to report by 31 October 2025, a deadline extended to 30 November.

The Commission advises on four matters: how the net proceeds of Union taxes are divided between the Union and the states, and then among the states; the principles for grants-in-aid from the Consolidated Fund of India, the Union’s main account; how to supplement the money of panchayats and municipalities, drawing on each state’s own Finance Commission; and anything else the President refers to it. This Commission’s terms of reference also asked it to review disaster-management funding.

The first split is called vertical devolution, between the Union and all the states together. The second, among the individual states, is horizontal devolution.

What the Commission recommends is advice. Article 281 requires the President to lay each recommendation before Parliament with a memorandum saying what was done about it, and Article 270 lets the President fix the states’ percentage by order after considering the Commission. The 2026 memorandum says orders on the accepted items will be issued after the President’s approval. According to the report, the terms of reference followed the Constitution’s wording and gave no further directions on what factors to weigh, which earlier commissions had received.

What goes into the pool and what stays out

The divisible pool is the Union’s tax revenue minus the cost of collecting it, with three exclusions: the taxes of the Union Territories, surcharges, and cesses. A surcharge is an extra levy on top of a tax. A cess is a tax earmarked for a stated purpose, such as roads or health. Article 270, as the 80th Amendment rewrote it in 2000, shares all Union List taxes except those under Articles 268, 269 and 269A and those two kinds of levy. The Amendment was notified on 9 June 2000 and took effect retrospectively from 1 April 1996. The 101st Amendment added Article 269A for the integrated GST in 2016, and our guide to the three lists of the Seventh Schedule shows which tax sits on which list.

The Comptroller and Auditor General certifies the final figure under Article 279. Table 7.4 of the report works through 2022-23, when the certified pool was Rs 23,68,305 crore, and 41 per cent of it, Rs 9,71,005 crore, was the devolution due. Payment starts from an estimate and is corrected twice, once when actual collections are known and again on the auditor’s certificate. The Commission recommended that the Union publish the certified figures every year, and the Government accepted that. By our arithmetic from the Receipt Budget, the states’ estimated share for 2026-27 is about 34.7 per cent of gross tax revenue, because cesses, surcharges and collection costs sit outside the pool.

From half of the income tax to 41 per cent of the pool

Sir Otto Niemeyer, appointed in 1936, recommended splitting income tax 50:50 between the Centre and the provinces, the report records. The First Finance Commission raised the states’ share of income tax to 55 per cent for 1952 to 1957. The Seventh, covering 1979 to 1984, took it to 85 per cent and doubled the states’ share of Union excise duty from 20 to 40 per cent.

Once the 80th Amendment pooled all shareable taxes, the states’ share of the single pool rose by stages. The Eleventh Commission recommended 29.5 per cent, the Twelfth 30.5 per cent and the Thirteenth 32 per cent. The Fourteenth jumped to 42 per cent for 2015 to 2020. The Fifteenth, which covered 2020-21 to 2025-26, set it at 41 per cent. PRS Legislative Research records that its final report was laid on 1 February 2021 and that the one point came off because Jammu and Kashmir had become two Union Territories, with the Centre providing for them from its own resources.

Looking at the long run, the Sixteenth wrote that India has moved on from the “quasi-federal” label that the Constituent Assembly’s 1948 expert committee on financial provisions gave it, and is now a full federation judged by revenue. After all transfers, it calculates, the Union and the states shared revenue at 43:57 during the Fifth Commission’s period and 33:67 during the Fifteenth’s. Our guide to Article 1 and Indian federalism covers the constitutional design behind those words.

How 41 per cent is split among 28 states

Jammu and Kashmir and Ladakh are Union Territories, so the formula covers 28 states. Each criterion has a weight, which is the part of the states’ share distributed by that test. The Sixteenth changed four of the six weights from the Fifteenth’s.

GSDP is gross state domestic product, the value of what a state produces in a year. “Per capita GSDP distance” gives more money per person to states with lower income per person, measured as the gap from a benchmark. The Commission set the benchmark at the average of the three richest states other than Goa and Sikkim, using 2018-19 to 2023-24 and leaving out the Covid year of 2020-21. This test carries 42.5 per cent of the weight, the largest of the six.

Contribution to GDP measures each state’s share of the national economy, using the square root of GSDP so that the biggest economies do not run away with the result. The report calls this the Commission’s first use of a contribution-to-GDP criterion, and it says the weight was set to give a change of direction without a drastic shift in shares.

Other changes are smaller. The report replaced the fertility-rate measure with the inverse of each state’s population growth between the 1971 and 2011 Censuses, and says that this reward for slower growth should be phased out in time. It cut the minimum area share each state is credited with from 2 to 1.5 per cent. For forest, it weights very dense forest at 1.0, moderately dense at 0.65 and open forest at 0.30, and sets aside a fifth of that weight for forest gained between 2015 and 2023.

Table 8.9 gives each state’s final share of the states’ portion. Uttar Pradesh gets 17.619 per cent, Bihar 9.948, Madhya Pradesh 7.347, West Bengal 7.215 and Maharashtra 6.441, while Sikkim gets 0.335 and Goa 0.365. By PRS’s comparison, 14 states gained against the Fifteenth’s shares and 14 lost. Karnataka’s moved from 3.65 to 4.13 and Kerala’s from 1.93 to 2.38, while Arunachal Pradesh’s fell from 1.76 to 1.35 and Madhya Pradesh’s from 7.85 to 7.35.

What the states and the Union each asked for

Eighteen of the 28 states asked for a share of 50 per cent, the report says. Five states named other figures, among them Nagaland at 48 per cent, Assam at 45 and Himachal Pradesh at 41, while Sikkim and Madhya Pradesh tied theirs to a wider pool. The states argued that the Constitution gives them more of the spending, on health, education, agriculture, drinking water, sanitation, welfare and law and order, and that they need more money to carry it out.

A majority of states also objected that cesses and surcharges are not shared. Gujarat, Karnataka, Kerala, Madhya Pradesh, Tamil Nadu and Uttar Pradesh were among those who proposed measures such as putting them in the pool or capping them. The Commission’s own figures show the divisible pool fell from 89.2 per cent of gross tax revenue under the Thirteenth Commission to 82.1 under the Fourteenth and 78.3 under the Fifteenth.

The Union’s memorandum asked for moderation in devolution without naming a figure. It cited defence modernisation and said that transfers of more than 49 per cent of its gross revenue receipts are not sustainable. It added that cesses are excluded by constitutional design and that their proceeds return to states through schemes such as Samagra Shiksha and PM POSHAN.

The Commission held that the Constitution does not allow capping cesses or surcharges, including them in the pool, or sharing the Union’s non-tax revenue. It called the states’ claim that cesses had wiped out the Fourteenth Commission’s increase “unsupported by data” while accepting that the pool had shrunk as a share of gross tax revenue. It found no room to cut the states’ share and retained 41 per cent. It floated a “grand bargain” too, in which the Union would fold much of the cess revenue into ordinary taxes and the states would accept a smaller share of the larger pool.

On the formula, seven states, among them Bihar, Odisha, Rajasthan and Uttar Pradesh, wanted the 45 per cent weight on income distance kept. Haryana suggested 15 per cent and Telangana 20. Maharashtra and Madhya Pradesh proposed 2.5 per cent for contribution to GDP, Tamil Nadu 12.5, Karnataka 20 and Telangana 50. The Union asked for a formula that rewards fiscal discipline and for limits on how far any state’s per capita share could rise or fall.

Grants on top of the tax share

The states’ tax share is not the whole transfer. Grants under Article 275(1) flow on the Commission’s advice, because Parliament has never passed a law on them. The Sixteenth recommended no revenue deficit grants, which cover the gap between a state’s income and spending, and no sector-specific or state-specific grants. Under the Fifteenth, 17 states had received revenue deficit grants, tapering to near zero by 2025-26. Expecting such grants, the report argues, weakens a state’s reason to raise revenue and trim spending. Of that assessment the Government says only that it takes note.

For local bodies it recommended Rs 7,91,493 crore across 2026-27 to 2030-31. Rural bodies get Rs 4,35,236 crore and urban bodies Rs 3,56,257 crore, the latter including Rs 56,100 crore for wastewater projects in growing urban centres and Rs 10,000 crore as a premium for merging peri-urban villages into larger towns. Of the basic and performance money, 80 per cent is basic and 20 per cent tied to performance. A state must have elected local bodies in place, publish their accounts online, and keep its State Finance Commission on schedule to claim it.

For disasters it recommended a corpus of Rs 2,04,401 crore for the State Disaster Response Fund and the State Disaster Mitigation Fund. The Union pays 75 per cent for most states and 90 per cent for the north-eastern and hill states, and its share of the corpus comes to Rs 1,55,915.85 crore. The Budget speech put the Commission’s grants for 2026-27, covering local bodies and disasters, at Rs 1.4 lakh crore.

What the Government accepted

In the memorandum the Government accepts the 41 per cent share, the horizontal formula, the local body grants and the disaster financing. It also accepts in principle the borrowing ceilings, a fiscal deficit of 3 per cent of GSDP for states, and says it will examine separately the advice on off-budget borrowing, the Union’s own deficit target of 3.5 per cent of GDP by the end of the period, centrally sponsored schemes, power, subsidies and public sector enterprises. The award period ends on 31 March 2031.