- Why in news
- On 1 February 2026, in the Union Budget 2026-27, the Finance Minister said the Government accepted the 16th Finance Commission's advice to keep the states' share of the divisible pool at 41 percent, with ₹1.4 lakh crore as grants for 2026-27.
- What it is
- The Finance Commission is a constitutional body under Article 280, set up every five years by the President. It recommends how Union tax proceeds are shared between the Centre and states (vertical) and among states (horizontal), and what grants-in-aid states get. The 16th Commission's report covers the period starting 2026-27.
- Vertical share
- The Government accepted the Commission's recommendation to keep the states' share of devolution at 41 percent.
- Report submission
- The Commission gave its report to the President on 17 November 2025.
- Article 281
- Article 281 requires the President to lay the Commission's recommendations, with an explanatory memorandum on action taken, before Parliament.
- Article 280
- Article 280 provides for the Finance Commission, constituted by the President every five years or earlier. It has a chairman and four other members.
- Previous share
- The 15th Finance Commission also fixed the states' share at 41 percent (reduced from 42 percent under the 14th, owing to the creation of the Union Territories of J&K and Ladakh).
Don’t confuse with Finance Commission vs NITI Aayog: The Finance Commission is a constitutional body that recommends tax devolution and grants. NITI Aayog is a non-statutory policy think tank.
Don’t confuse with Article 280 vs Article 281: Article 280 creates the Commission; Article 281 requires its recommendations to be laid before Parliament.
Laws, judgments and statutory bodies: 30 Prelims questions since 2013 (what the law says, who chairs, legal basis). In Mains, 44 news-triggered questions, most in GS2, asking for provisions and challenges.
Why it matters
- Fixes the formula for sharing Union taxes with states, supporting fiscal federalism.
- Retaining 41 percent gives states predictable resources for planning.
- Grants for local bodies and disaster management support the third tier and disaster response.
Problems
- Cesses and surcharges outside the divisible pool reduce the effective share of states.
- States with higher growth and contribution argue that devolution criteria penalise them.
- The Commission's advice is not binding, so states depend on the Centre's acceptance.
Way forward
- Limit cesses and surcharges, or bring them into the divisible pool.
- Balance equity and efficiency in horizontal criteria to reward performance.
- Lay the report and action taken memorandum promptly and discuss them in Parliament.
Put in your answer
Article 281: Cite it to show the Constitution requires the Union to place the Commission's advice and action taken before Parliament.
41 percent share: Use the 41 percent retained share as the data point on the Centre-state tax split.
- 2018Mains GS2 · Q14How is Finance Commission constituted and its recently constituted terms of reference
- 2013Mains GS2 · Q7Discuss 13th Finance Commission recommendations departing from earlier commissions for local finances
- 2021Mains GS2 · Q3How 14th Finance Commission recommendations enabled states to improve fiscal position
- 2011Prelims Q45Which statement correctly describes the purpose of the Finance Commission of India
- 2015Prelims Q2Which statements about 14th Finance Commission's share and grants are correct
- 2025Prelims Q66Which statements about 15th Finance Commission recommendations are correct
UPSC’s own questions that come close to this issue, from our Prelims and Mains banks.
Prelims practice · Single answer
Ours, not from a UPSC paper
Consider the following statements regarding the Finance Commission and the recent Union Budget 2026-27 announcement: 1. The Government has accepted the 16th Finance Commission's recommendation to retain the states' vertical share of devolution at 41 percent. 2. Article 281 requires the recommendations of the Finance Commission, with an explanatory memorandum on action taken, to be laid before Parliament. 3. The Finance Commission is constituted by the President under Article 280 every ten years. 4. The 16th Finance Commission submitted its report to the Prime Minister.
Which of the statements given above are correct?
True or false?
1 of 4
Statements the way Prelims prints them. Say first, then see the fact.
1.The Government has accepted the 16th Finance Commission's recommendation to retain the states' vertical share of devolution at 41 percent.
True. The vertical share stays at 41 percent.
2.Article 281 requires the Commission's recommendations and an explanatory memorandum on action taken to be laid before Parliament.
True. Article 281 mandates laying the recommendations with an action taken memorandum.
3.The Finance Commission is constituted by the President under Article 280 of the Constitution.
True. Article 280 provides for the Finance Commission, constituted by the President.
4.The Finance Commission is constituted under Article 280 every ten years.
False. It is constituted every five years or earlier.
Written by us from the release, not by UPSC; checked by a second model.
Mains practice
15 marks · 250 words
The Union Budget 2026-27 accepted the 16th Finance Commission's recommendation to retain the states' share in the divisible pool at 41 percent, with grants of ₹1.4 lakh crore for 2026-27. In this context, examine the constitutional provisions governing the Finance Commission and discuss the challenges it faces in balancing vertical and horizontal fiscal equity in Indian federalism.
Worth revising until Prelims 2027: most news questions come within two years of the event.