The Sixteenth Finance Commission has recommended that the share of states in the divisible pool be kept at 41%, but has recommended several significant changes that could affect the allocation of funds. The Finance Commission report was tabled in Parliament on Sunday by Finance Minister Nirmala Sitharaman after presenting the Union Budget 2026-27 along with an action report.

To determine the inter se participation of the states, the XVI Finance Commission included a new parameter of the state’s contribution to the gross domestic product (GDP) in the horizontal decentralization criteria.

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“…with the growing ambition of the country as a backdrop, it is necessary to recognize the efficiency and above all the contributions of the States to growth. That is why, for the first time, this Commission decided to add the contribution of the State to the GDP among its criteria for horizontal decentralization”, he said in his report. Taking into account the principle of gradualness, the Commission decided that the weight assigned to the criterion should be such that it only signifies a change in direction without causing a drastic change in the actions of States. Consequently, a weightage of 10% out of a total of 100 was given to this criterion.

In total, it was based on the population based on the 2011 Census (weights of 17.5%), the demographic yield (10%), the area (10%), the forest (10%), the distance from the income per capita (42.5%) and the contribution of the State to the Gross Domestic Product (GDP).

It has also recommended that to bring more transparency about the divisible pool and actual transfer, the government should disclose every year the data relating to net income as certified by CAG under Article 279.

The Commission further recommended that the states comply with the constitutional provisions relating to the regular constitution of the State Finance Commission (SFC) on the expiry of five years from the formation of the previous SFC and ensure submission of the action taken report (ATR) to the state legislature within 6 months of the submission of the SFC report.

The Commission has also recommended that the fiscal deficit of the states should be limited to 3% of their respective GSDP (excluding borrowings under SASCI) and to ensure the stability of the State Government debts, this should be strictly enforced in accordance with Clause (3) of Article 293 of the Constitution. The Union Government should reduce its fiscal deficit to 3.5% of GDP by the end of the award period.

The government said it has accepted, in principle, the recommendation on the quantum (expressed as a percentage of GSDP) of States’ net borrowing limits. However, he said other recommendations of the Commission, including those related to off-budget borrowing, modification of state FRLs, fiscal deficit of the union government will be examined separately.

The recommendations of the Sixteenth Finance Commission cover the financial years 2026-27 to 2030-31, from April 1, 2026.

For FY27, the total shared resources, tax refund and FC grants, with states through the Finance Commission route, is estimated at ₹ 16.56 lakh crore in BE 2026-27. In BE 2026-27, the tax refund to the States is estimated at ₹ 15.26 billion as compared to ₹ 13.93 billion in BE 2025-26, which includes an additional amount of ₹ 9,084.02 billion on account of dues collected by the Union Government from the states in previous years. Tax refund to States during BE 2026-27 is 3.9% of GDP and Rs 1.33 billion more than RE 2025-26 tax refund (including previous arrears).