The 16th Finance Commission is a constitutional body established by the President of India under Article 280 of the Constitution. The Finance Commission was first constituted on April 6, 1952, to define the financial relations between the Union and State governments, addressing the problem of vertical and horizontal fiscal imbalances in the federal structure. The 16th Finance Commission was constituted by the President on December 31, 2023, with Arvind Panagariya as its Chairman.
The Commission's core mechanism is to make recommendations to the President on the distribution of financial resources for a five-year period, which for the 16th Finance Commission is April 1, 2026, to March 31, 2031. Its mandate, outlined in Article 280(3), includes recommending the distribution of the net proceeds of taxes between the Union and the States (vertical devolution) and the allocation of those shares among the States (horizontal devolution). It also determines the principles governing grants-in-aid to the States from the Consolidated Fund of India under Article 275 and measures to augment a State's Consolidated Fund to supplement the resources of Panchayats and Municipalities.
The Commission connects to the broader concept of fiscal federalism and operates in a post-Planning Commission era, making it the primary architect of Centre-State financial relations. The 16th Finance Commission was mandated to submit its report by October 31, 2025. It has continued the 15th Finance Commission's recommendation of the States' share in the divisible pool of central taxes at 41%. However, it has changed the criteria for horizontal devolution by introducing a 10% weight for "Contribution to GDP," replacing the "Tax and Fiscal Efforts" parameter used by the 15th Finance Commission. The Commission's terms of reference also included a review of the financing arrangements for Disaster Management initiatives under the Disaster Management Act, 2005.