Union Finance Minister Nirmala Sitharaman in Lok Sabha on February 1, 2026. Credit: Sansad TV
The Sixteenth Finance Commission (16th FC) has recommended that the Central Government retain the 41% share of tax devolution to the States that had been implemented since 2021. Finance Minister Nirmala Sitharaman, in her Budget 2026 speech on Sunday (February 1, 2026), announced that the Centre has accepted the 16th FC’s recommendations.
“The Government has accepted the recommendation of the Commission to retain the vertical share of devolution at 41%,” Ms. Sitharaman said. “As recommended by the Commission, I have provided ₹1.4 lakh crore to the States for the FY 2026-27 as Finance Commission Grants. These include Rural and Urban Local Body and Disaster Management Grants.”
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The 16th FC was formally constituted on December 31, 2023, under the chairmanship of Arvind Panagariya, with the task of making recommendations for the five-year period April 1, 2026 to March 31, 2031. It submitted its report to the President of India on November 17, 2025, which was tabled in Parliament by Ms. Sitharaman on Sunday (December 1, 2026).
‘Grand bargain’ between Centre & States
The report of the 16th FC noted that the “only instrument” available to the Finance Commission to assist the finances of the Union government was its share in the divisible pool.
It said that there was no further space to cut the States’ share in the divisible pool as the Centre’s cesses and surcharges — not sharable with the States — had “cut” the size of the divisible pool from 89.1% of gross tax revenues in 2014‑15 to a 74‑80% during the 2020-24 period for which actuals figures are available.
“The Commission is of the view that if an efficient and broad‑based system of taxation is to be put in place, a grand bargain would have to be struck between the Union and States in which the Union would agree to fold a large part of the revenue from cesses and surcharges into regular taxes and States would agree to a smaller share in the resulting larger divisible pool, with no loss of revenues to either side,” the report said.
“Presently, for its award period, the Commission recommends retaining the States’ share in the divisible pool at its current level of 41%,” the report said.
Horizontal formula tweaked
While the Commission recommended the same share of devolution between the Centre and States, it has tweaked the formula and weightages that decide the division of that 41% between States.
A State’s population now accounts for 17.5% of the weightage up from the previous 15%. Its demographic performance — how successfully it has managed to contain population growth — has a lower weightage of 10% from the previous 12.5%. The area of the State has been granted a 10% weightage by the 16th FC as compared to 15% previously.
A State’s forest cover now receives a 10% weightage, the same as earlier. The State’s per capita GSDP difference — the difference between a State’s average per capita income and that of the State with the highest per capita income — has the highest weightage of 42.5%, down from 45% earlier.
The 16th Finance Commission has replaced the previous ‘tax and fiscal efforts’ category, which had a weightage of 2.5%, with a ‘contribution to GDP’ that carries a 10% weight.
Southern States benefit
Under this new formulation, all the five Southern States of Tamil Nadu, Kerala, Andhra Pradesh, Telangana and Karnataka have seen their shares in the devolution amount grow.
As per the 16th FC’s recommendations, Andhra Pradesh is to receive 4.217% of the devolved amount, up from the previous 4.047%. Karnataka’s share has gone up to 4.131% from 3.647%. Kerala’s share has increased to 2.382% from 1.925%. Tamil Nadu’s share has increased to 4.097% from 4.079%, and Telangana’s share has gone up to 2.174% from 2.102%.
On the other hand, Uttar Pradesh and Bihar, India’s two most populous States and those with the highest share of tax devolution, have seen their shares reduce. Uttar Pradesh saw its share fall to 17.619% from 17.939%. Bihar’s share has fallen to 9.948% from 10.058%.
Published – February 01, 2026 11:22 am IST
