Terms of Reference for 16th Finance Commission

GS Paper II Indian Polity and Governance

Context: Recently, the central government has approved the terms of reference for the 16th Finance Commission (FC).

16th Finance Commission Report

Report: The 16th Finance Commission will submit its report by October 2025 and the recommendations will be valid for a 5 year period beginning April 2026.
Terms of Reference (ToR): Detailed TOR for the 16th FC will be notified in due course of time.

The Constitution of India (CoI) envisages the Finance commission as the balancing wheel of fiscal federalism in India. The first Finance Commission was set up in 1951.
Set up under Article 280 of the Constitution, FC is a constitutional body formed by the President of India to give suggestions on centre-state financial relations.
Core Responsibility:
- To evaluate the state of finances of the Union and State Governments.
- Recommend the sharing of taxes between them.
- Lay down the principles determining the distribution of these taxes among States.
Working: It is characterized by consultations with all levels of government, thus strengthening the principle of cooperative federalism.
Composition: It consists of a chairman and 4 other members to be appointed by the President.
Nature of Recommendations: Advisory in nature, not binding on the government.

ToR: It is the matters to which a study or report is limited.
Make recommendations to the following matters:
- Taxes Distribution: Distribution between the Union and the States of the net proceeds of taxes.
- Grants-in-Aid to States: Principles governing the grants-in-aid of the revenues of the States out of the Consolidated Fund of India and sums to be paid to the States.
- Panchayats and Municipalities Resources: The measures needed to supplement the resources of the Panchayats and Municipalities are based on the recommendations made by the Finance Commission of the State.
Financing Disaster Management: Review the present arrangements on financing Disaster Management initiatives and make appropriate recommendations.
Report: Make its report available by 31st October 2025 covering a period of five years commencing on the 1st day of April 2026.