Why in News?
The 16th Finance Commission (FC) report was tabled in Parliament on February 1, 2026, along with the Union Budget. The Government has accepted key tax devolution and grant recommendations for the period 2026–27 to 2030–31.
Key Recommendations:
1. Vertical Devolution (Centre–State Share)
- 41% of divisible tax pool allocated to States
- Unchanged from the 15th Finance Commission
- Ensures continuity and fiscal stability for States
2. Grants-in-Aid (2026–27)
- Total allocation: ₹1.4 lakh crore
- Includes:
- Grants to Rural Local Bodies (Panchayats)
- Grants to Urban Local Bodies (Municipalities)
- Disaster management funding
Horizontal Devolution Formula (2026–31)
| Criterion | 15th FC Weight (2021–26) | 16th FC Weight (2026–31) |
| Income Distance | 45.0% | 42.5% |
| Population (2011 Census) | 15.0% | 17.5% |
| Demographic Performance | 12.5% | 10.0% |
| Area | 15% | 10% |
| Forest & Ecology | 10% | 10% |
| Contribution to GDP (New) | – | 10% |
| Tax and Fiscal Effort | 2.5% | – |
Background:
The Finance Commission is a constitutional body under Article 280. Constituted every 5 years by the President of India. Functions:
- Recommend tax sharing (Centre–State)
- Suggest grants-in-aid
- Promote fiscal federalism
16th Finance Commission
- Chairman: Dr. Arvind Panagariya
- Award Period: 2026–27 to 2030–31