The 16th Finance Commission is a Constitutional Body and a quasi-judicial institution in India, constituted by the President of India on December 31, 2023, under Article 280(1) of the Constitution. The Finance Commission was first established in 1951 to define the financial relations between the Union and State Governments, addressing the problem of vertical and horizontal fiscal imbalances in India's federal structure. The Constitution mandates the President to constitute a Finance Commission every five years, or earlier if deemed necessary.
The Commission's primary mechanism is to make recommendations to the President on three key matters, as outlined in Article 280(3). First, it recommends the distribution of the net proceeds of taxes between the Union and the States, known as vertical devolution, and the allocation of those shares among the States, known as horizontal devolution. Second, it determines the principles that should govern the grants-in-aid of the revenues of the States out of the Consolidated Fund of India. Third, it suggests measures needed to augment the Consolidated Fund of a State to supplement the resources of the Panchayats and Municipalities based on the recommendations of the State Finance Commission.
The 16th Finance Commission, chaired by Dr. Arvind Panagariya, will cover the five-year period commencing on April 1, 2026. It connects directly to the concept of fiscal federalism and the financial provisions in Part XII of the Constitution. A specific addition to the terms of reference for the 16th Finance Commission is the review of the present arrangements for financing Disaster Management initiatives, with reference to the funds constituted under the Disaster Management Act, 2005. The Commission is requested to submit its report by October 31, 2025. The recommendations of the Finance Commission are advisory in nature, not binding on the government.