Tax devolution for States at 41%; South gets share hike

POLITY – INDEPENDENT BODIES

2 FEBRUARY 2026

• The 16^th Finance Commission chaired by Arvind Panagariya, submitted its report to the President on November 17, 2025, which was tabled in Parliament on 1^st February 2026.
• It has recommended that the Centre retain the 41% share of tax devolution to States as has been in force since 2021.
• Finance Minister Nirmala Sitharaman, in her Budget speech, announced that the Centre has accepted the recommendations.
• Ms. Sitharaman said, “As recommended by the Commission, I have provided ₹1.4 lakh crore to the States for the FY 2026-27 as Finance Commission Grants. These include Rural and Urban Local Body and Disaster Management Grants.”
• The 16^th Finance Commission has raised the share for five Southern States — Tamil Nadu, Kerala, Andhra Pradesh, Telangana, and Karnataka.
• The report said there was no further space to cut the States’ share in the divisible pool as the Centre’s cesses and surcharges — not sharable with the States — had “cut” the size of the divisible pool from 89.1% of gross tax revenues in 2014-15 to 74%-80% during the 2020-24 period for which actual figures are available.
• A State’s population now accounts for 17.5% of the weightage up from the previous 15%.
• Its demographic performance — how successfully it has managed to contain population growth — has a lower weightage of 10% from the previous 12.5%.
• The area of the State has been granted a 10% weightage by the 16th FC as compared to 15% previously.
• A State’s forest cover now receives a 10% weightage, the same as earlier.
• Per capita GSDP difference — the difference between a State’s average per capita income and that of the State with the highest per capita income — has the highest weightage of 42.5%, down from 45% earlier.