The Finance Commission of India

Every rupee of income tax or GST first reaches the Centre. But roads, schools and hospitals are mostly built by the States. So who decides how much money flows back? Every five years, a small panel appointed by the President does the sums. It is called the Finance Commission, and exams love its numbers.

1Who decides how India shares its tax money?

Think of a family that earns in one pocket but spends from many. The Centre collects the big taxes. The States carry heavy duties. The gap needs a fair referee.

• The referee is the Finance Commission. It is a constitutional body.
• Its first job is vertical sharing. How much of the pool goes to the States?
• Its second job is horizontal sharing. How is that amount split among the States?
• It also suggests grants for States that need extra help.

2How is a Finance Commission formed?

• The President sets up a Finance Commission under Article 280.
• The first one came within two years of the Constitution starting. It was appointed in 1951, with K.C. Neogy as Chairman.
• After that, a new Commission is set up every five years, or earlier if the President thinks it needed.
• Each Commission has a Chairman and four other members.
• Parliament decides the members’ qualifications by law. The Chairman should have experience in public affairs. The members need skills such as law, finance, administration and economics.

3What does the Commission recommend?

• How the net proceeds of central taxes are shared between the Centre and the States.
• The principles for grants-in-aid to States that need help, under Article 275.
• Steps to raise State funds so that Panchayats and Municipalities get more resources.
• Any other matter the President sends to it.

4Are its recommendations binding?

Here the exam trap hides. The Commission advises. It does not command.

• Its report goes to the President. Under Article 281, the President lays it before Parliament with a note on the action taken.
• The recommendations are not automatically binding.
• In practice the Centre accepts most of them, because States expect it.

5How do the 14th, 15th and 16th Commissions compare?

• The 14th Commission made the biggest jump. It raised the States’ share from 32% to 42%.
• It also moved away from sector-specific grants. It kept only three channels: revenue deficit grants, disaster grants and local body grants.
• The 15th Commission cut the share to 41%. The one point was set aside for the new Union Territories of Jammu and Kashmir and Ladakh.
• The 16th Commission kept the share at 41%.

6How does the 15th Commission split money among states?

The 15th Commission used six criteria to divide the States’ share. Learn them as two groups.

• The old ones: income distance, population and area.
• The added ones: demographic performance, forest and ecology, and tax and fiscal effort.
• Income distance carried the biggest weight. Tax effort was reintroduced to reward States that raise their own revenue.
• Two ideas that sound plausible were not used: governance reforms and a stable government.

7What are the exam traps on the Finance Commission?

• Trap 1: the 15th Commission gave 45%. It gave 41%.
• Trap 2: the 14th Commission gave 41%. It gave 42%.
• Trap 3: its recommendations are binding. They are advisory.
• Trap 4: governance reforms and a stable government were criteria. They were not.
• Trap 5: the 14th Commission kept sector-specific grants. It moved away from them.

8How has the Finance Commission been asked in exams?

9What did the 16th Finance Commission change?

• The 16th Commission was chaired by Arvind Panagariya. Its report for 2026-31 was tabled in Parliament on 1 February 2026, with the Union Budget.
• It kept the States’ share at 41%. Many States had asked for far more.
• It added a new horizontal criterion, contribution to GDP, with a 10% weight.
• It stopped revenue deficit grants, sector-specific grants and State-specific grants.
• It recommended about ₹7.91 lakh crore for rural and urban local bodies, up from about ₹4.36 lakh crore under the 15th Commission.
• It also set a target for States to keep fiscal deficits within 3% of GSDP.