TL;DR: The 16th Finance Commission marks a shift toward rewarding economic performance, benefiting southern States through a new GDP-based criterion, while some larger States see reduced shares. It also increased funding for local bodies and disaster management, including adding heatwaves and lightning as notified disasters, thereby reflecting changing priorities toward growth, local governance, and climate resilience. However, past experience shows that actual fund releases often fall short of recommendations, weakening impact, particularly for local bodies.

Context

India’s fiscal federalism has undergone a great transformation since independence. In the early decades, limited Union revenues and centralised planning meant States received modest transfers. Over seven decades and sixteen Finance Commissions, this has steadily shifted toward greater devolution to States, with the government progressively transferring larger shares of tax revenue to States.

The divisible pool, i.e., net proceeds of Union taxes excluding cesses and surcharges, is the primary channel through which resources flow from the Centre to the States. With India poised to become the world’s third-largest economy during 2026-31, the 16th FC’s recommendations carry implications not just for fiscal balance, but for sustaining the growth rate.

Who compiles this data?

The information on tax devolution and Finance Commission transfers comes from several sources. The Finance Commission itself, which is a constitutional body appointed every five years under Article 280 of the Constitution, publishes detailed reports with all its recommendations and supporting data. These reports are available on the Finance Commission’s official website. The supporting data is from RBI’s Database on Indian Economy, Comptroller and Auditor General’s reports, and budget documents.

Where can I download clean & structured data on tax devolutions?

Clean, structured, and ready-to-use datasets related to Direct & Indirect Tax Collection in States and Devolution-cum-Transfer of Funds from the Government of India to States can be found in Dataful.

Key Insights

• Major changes in the devolution formula: Growth rewarded
  The 16th Finance Commission has recommended retaining the States’ share in the divisible pool at its current level of 41% same as the recommendation of the 15^th Finance Commission. On horizontal devolution between the states, the Finance Commission has made a major shift by adding a state’s share in national GDP as a criterion for fund distribution, rewarding growth, efficiency, and economic performance for the first time in decades. States that create jobs, attract investment, and boost output will now get a larger share. To accommodate this, weights for income distance, area, and tax effort (own tax revenue (OTR) to GSDP ratio) have been adjusted.

  The forest cover criterion now includes open forests, with different weights and incentives for improvement. The minimum floor for states has been reduced from 2% to 1.5%. On demographics, the Commission replaced fertility rate with population growth (1971–2011) but signalled that this criterion should be phased out, as India now faces ageing rather than overpopulation. Its weight has also been reduced.

  

  Source: The Hindu

• Southern States gain from the latest devolution
  As noted earlier, the 16th Finance Commission has recommended that States continue to receive 41% of the Union’s divisible tax pool for the next five years. Under vertical devolution, Uttar Pradesh remains the largest recipient with 17.62%, followed by Bihar at 9.95% and Maharashtra at 6.44%.

  Among the southern States, Andhra Pradesh, Karnataka, Tamil Nadu, Telangana, and Kerala have been allotted 4.22%, 4.13%, 4.10%, 2.17%, and 1.36%, respectively. These States have gained compared to the 15th Finance Commission, partly due to the inclusion of GDP contribution in the formula.

  Meanwhile, States such as Uttar Pradesh, Bihar, Rajasthan, Odisha, West Bengal, and Madhya Pradesh have experienced a reduction in their overall share of the divisible pool compared to the 15^th Finance Commission.

• Local Bodies receive less than the recommended allocations
  The 73rd and 74th Constitutional Amendments (1993) laid the foundation for strengthening the powers and finances of rural and urban local bodies. Following earlier practice, the 16th Finance Commission continued the same criteria as previous Commissions. It recommended a total of ₹7,91,493 crore as grants for duly constituted RLBs and ULBs for the period from 2026‑27 to 2030‑31, out of which ₹ 56,100 crore for a special infrastructure component and ₹10,000 crore for urbanisation premium (a one‑time grant as an incentive for the merger of peri‑urban villages into an adjoining larger ULB with an existing population of not less than one lakh) are allocated.

  However, past data shows a consistent gap between what is recommended and what is actually released. For rural bodies, only 82% of the Tenth Commission’s recommendation was released, and this worsened under the Fifteenth Commission, where just 74% of the ₹2.36 lakh crore was paid by July 2025, leaving a shortfall of over ₹61,000 crore. Urban local bodies fared even worse, receiving only 63% of their recommended ₹1.21 lakh crore under the Fifteenth Commission, the lowest release rate since the Tenth Commission.

  Despite a sharp rise in overall allocations over time, the growing gap between promised and delivered funds shows weakening implementation.

• 16^th FC recommends adding Heatwave and Lightning to notified disasters
  The 15th Finance Commission introduced major reforms in disaster management by shifting from a purely expenditure-based allocation to a mix of past spending and a Disaster Risk Index (DRI). It also raised disaster management funding sharply, recommending ₹1,60,153 crore for 2021–22 to 2025–26, with about 93% of allocations released in the first four years. Almost 60% of the expenditure was towards floods, followed by drought, State‑specific disasters, and cyclones in that order. They together account for 92% of the total expenditure.

  Building on this, the 16^th  Finance Commission has recommended a total corpus of ₹2,04,401 crore for States for 2026–27 to 2030–31, split 80:20 between SDRF and SDMF. The Commission has also recommended considering heatwaves and lightning as notified disasters at the national level, as opposed to the state-specific disaster classification.

Why does it matter?

India is set to become the world’s third-largest economy by the end of this decade. How tax revenues are shared between the Centre and States is crucial for sustaining growth. These numbers matter because they show how the 16th Finance Commission is reshaping fiscal priorities while exposing long-standing gaps in implementation.

The GDP share criterion in tax devolution encourages states to boost productivity and growth, rewarding better economic performing states with higher transfers. Although significant amounts have been recommended for local bodies, past experience shows that actual releases fall well short, weakening local governance. Similarly, the addition of heatwaves and lightning as notified disasters and the increase in disaster funding reflect rising climate risks, but their impact will depend on timely fund release.

Cumulatively, these allocations highlight a shift toward growth, stronger local financing, and climate resilience, with success hinging on effective implementation.

Key Numbers

• Change in Shares from 15th to 16th Finance Commission (Difference of %):
  Top Gainers: Karnataka – 0.48, Kerala- 0.46, Gujarat – 0.28, Haryana- 0.27 and Punjab- 0.19
  Top Losers: Madhya Pradesh- 0.50; Uttar Pradesh- 0.32, West Bengal – 0.31; Odisha & Bihar – 0.11 and Rajasthan – 0.10

• Recommendations to Local Bodies grants by FCs (In ₹ Crores)
  ULBs: FC-10: 1000 ; FC-13: 23,111 ; FC-15: 1,21,055 ; FC-16: 3,56,257
  RLBs: FC-10: 4381 ; FC-13: 64,408 ; FC-15: 2,36,805 ; FC-16: 4,35,236

• Allocation to disaster relief by previous FCs (In ₹ Crores)
  FC-11: 11,007 ; FC-13: 33,581 ; FC-15: 1,60,153; FC-16: 2,04,401