Tax devolution to States: 16th Finance Commission
Vertical devolution (Centre–States share)
The 16th Finance Commission recommended retaining the 41% share of tax devolution to States.
This share has been in force since 2021.
The Union Government accepted the recommendation.
The Centre retains the remaining 59% of the divisible pool.
Finance Commission grants
₹1.4 lakh crore provided to States for FY 2026–27 as Finance Commission Grants.
These include:
Rural Local Body Grants
Urban Local Body Grants
Disaster Management Grants
These grants are separate from tax devolution.
Rationale for retaining 41%
The Commission noted that the only instrument available to assist the Centre’s finances is its share in the divisible pool.
There is no further scope to reduce States’ share.
Cesses and surcharges, which are not shareable with States, have reduced the size of the divisible pool.
The divisible pool declined from 89.1% of gross tax revenues in 2014–15 to 74–80% during 2020–24.
Horizontal devolution (distribution among States)
Major changes in weightage criteria
Population
Increased to 17.5% from 15%.
Demographic performance
Reduced to 10% from 12.5%.
Reflects lower emphasis on population control performance.
Area
Reduced to 10% from 15%.
Forest cover
Retained at 10%.
Recognises ecological services provided by States.
Per capita GSDP difference
Highest weightage at 42.5%.
Reduced from 45%.
Measures income gap between a State and the richest State.
Impact on Southern States
The revised formula increased the share of five Southern States:
Andhra Pradesh: increased to 4.217%
Karnataka: increased to 4.131%
Kerala: increased to 2.382%
Tamil Nadu: increased to 4.097%
Telangana: increased to 2.174%
Indicates redistribution through horizontal criteria rather than change in vertical share.
Institutional and procedural aspects
The 16th Finance Commission submitted its report to the President on November 17, 2025.
The report was tabled in Parliament subsequently.
Prelims Practice MCQs
Q. With reference to the recommendations of the 16th Finance Commission, consider the following statements:
The formula for horizontal devolution among States was revised.
The revised formula increased the share of certain Southern States.
The vertical share between the Centre and States was reduced.
Which of the statements given above is/are correct?
A. 1 and 2 only
B. 2 and 3 only
C. 1 only
D. 1, 2 and 3
Correct answer: A
Explanation:
Statements 1 and 2 are correct. The formula for distribution among States was tweaked, resulting in higher shares for five Southern States. Statement 3 is incorrect because the vertical share remained unchanged at 41%.
Q. Consider the following statements regarding the divisible pool of taxes:
Cesses and surcharges are shareable with the States.
The size of the divisible pool has declined as a proportion of gross tax revenues.
The divisible pool declined from 89.1% in 2014–15 to around 74–80% during 2020–24.
Which of the statements given above is/are correct?
A. 2 and 3 only
B. 1 and 2 only
C. 1 only
D. 1, 2 and 3
Correct answer: A
Explanation:
Statements 2 and 3 are correct. Cesses and surcharges are not shareable with States, making statement 1 incorrect.
Q. With reference to the criteria used for horizontal devolution by the 16th Finance Commission, consider the following statements:
Population has been assigned a higher weightage than earlier.
Demographic performance has been given a higher weightage compared to the previous commission.
Area has been assigned a lower weightage than earlier.
Which of the statements given above is/are correct?
A. 1 and 3 only
B. 1 only
C. 2 and 3 only
D. 1, 2 and 3
Correct answer: A
Explanation:
Statement 1 is correct as population weight increased to 17.5% from 15%.
Statement 2 is incorrect because demographic performance weight was reduced from 12.5% to 10%.
Statement 3 is correct as area weight was reduced from 15% to 10%.
Q. Consider the following statements regarding income-based criteria in tax devolution:
Per capita GSDP difference has the highest weightage among all criteria.
Its weightage has increased compared to the previous Finance Commission.
It measures the gap between a State’s per capita income and that of the richest State.
Which of the statements given above is/are correct?
A. 1 and 3 only
B. 2 and 3 only
C. 1 only
D. 1, 2 and 3
Correct answer: A
Explanation:
Statements 1 and 3 are correct. The weightage is the highest at 42.5%. Statement 2 is incorrect as the weightage was reduced from 45%.
Q. With reference to forest cover as a criterion for tax devolution, consider the following statements:
Forest cover continues to have a 10% weightage.
The weightage for forest cover was increased by the 16th Finance Commission.
Forest cover is used as an indicator of ecological services provided by States.
Which of the statements given above is/are correct?
A. 1 and 3 only
B. 1 only
C. 2 and 3 only
D. 1, 2 and 3
Correct answer: A
Explanation:
Statement 1 is correct as forest cover retains a 10% weightage.
Statement 2 is incorrect because the weightage remains unchanged.
Statement 3 reflects the rationale behind using forest cover as a criterion.
Q. As per the recommendations of the 16th Finance Commission, which of the following States recorded an increase in their share of tax devolution?
Andhra Pradesh
Karnataka
Kerala
Tamil Nadu
Telangana
Select the correct answer using the code below:
A. 1, 2 and 3 only
B. 1, 2, 3 and 4 only
C. 1, 2, 3, 4 and 5
D. 2, 3 and 5 only
Correct answer: C
Explanation:
All five listed Southern States saw an increase in their respective shares of tax devolution as per the revised formula.