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. 

About Finance Commission 

• 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. 

What are the Terms of Reference for the 16th Finance Commission?

• 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.

News Source: PIB