16th Finance Commission Recommendations Accepted in Union Budget 2026

In the Union Budget 2026, the Finance Minister announced that the Union Government has accepted the recommendations of the Sixteenth Finance Commission (16th FC).

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Vertical Devolution Recommendation

• Retention of 41% Share: The 16th FC recommended retaining the 41% share of States in the divisible pool of taxes, continuing the arrangement in place since the 15th FC.
  • This share was first fixed at 41% by the 15th FC following the reorganisation of Jammu & Kashmir
• Finance Commission Grants: An allocation of ₹1.4 lakh crore has been provided for FY 2026–27, covering Rural and Urban Local Body Grants and Disaster Management Grants.
• Issue of Cesses and Surcharges:
  • Shrinking Divisible Pool: The Commission noted that the share of gross tax revenues entering the divisible pool declined from 89.1% in 2014–15 to 74–80% during 2020–24, mainly due to rising cesses and surcharges.
  • It held that there was no further fiscal space to reduce the States’ share in the divisible pool
  • Grand Bargain Proposal: The Commission suggested a long-term “grand bargain” where
    • The Centre would subsume a large part of cesses and surcharges into regular taxes.
    • States would accept a smaller share of a larger divisible pool, ensuring no revenue loss to either side.

Horizontal Devolution Formula

• Horizontal devolution refers to the distribution of the States’ share among individual States.
• The 16th FC revised the criteria and weights used to distribute the 41% among States.
• Revised Criteria and Weightages

Rationale for New GDP Contribution Criterion

• Recognition of Economic Contribution: The new criterion acknowledges States’ contribution to national income, addressing long-standing concerns of economically stronger States.
• Balance Between Equity and Efficiency: While income distance continues to support poorer States, GDP contribution introduces an efficiency-oriented element into devolution.

Impact on Southern States

• Overall Outcome: All five Southern States recorded an increase in their share of tax devolution.
• Reason: Greater weight to contribution to GDP and reduced emphasis on population and area benefited economically stronger States
• State-wise Changes:
  • Andhra Pradesh: Increased to 4.217% from 4.047%.
  • Karnataka: Increased to 4.131% from 3.647%.
  • Kerala: Increased to 2.382% from 1.925%.
  • Tamil Nadu: Increased to 4.097% from 4.079%.
  • Telangana: Increased to 2.174% from 2.102%.

Impact on Northern States

• Uttar Pradesh: Share reduced to 17.619% from 17.939%.
• Bihar: Share reduced to 9.948% from 10.058%.
• Reason: Higher population weight continues to benefit them, but reduced weight to population growth and income distance has marginally lowered their shares

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