The Finance Minister of India, Nirmala Sitharaman presented the 16th Finance Commission (FC) report in Lok Sabha (LS) on February 01, 2026. The government has accepted its key recommendations to maintain the states’ share in central taxes at 41% for the period of 2026-31. The Finance Commission is established under Article 280 of the Constitution of India, that recommends the tax devolution between the centre and the states. The 16th Finance Commission is chaired by Dr. Arvind Panagariya.
Vertical Devolution
- The states’ share in divisible pool of Central taxes remains unchanged at 41%.
- Divisible Pool: Calculated after excluding cesses, surcharges, and the cost of collection from the Centre’s gross tax revenue.
- Impact: it ensures stability in resource transfer to states, acting as a key feature of federalism.
Horizontal Devolution
| Criteria | 15th FC Weight | 16th FC Weight |
| Income Distance | 45% | 42.5% |
| Population | 15% | 17.5% |
| Demographic Performance | 12.5% | 10% |
| Area | 15% | 10% |
| Forest and Ecology | 10% | 10% |
| Tax Effort | 2.5% | 0% |
| Contribution to GDP | 0% | 10% |
| Total | 100% | 100% |
Key Changes
- Contribution to GDP: new 10% weight to reward states for their economic output (Southern states may benefit from it).
- Forest and Ecology: now includes open forests & growth in forest cover.
- Demographic Performance: Shift from Total Fertility Rate (TFR) to population growth between 1971-2011.
- Centre-State Cost Sharing: 90:10 for Northeastern & Himalayan states and 75:25 for all other states.
