The 16th Finance Commission, chaired by Dr Arvind Panagariya, submitted its report for the award period 2026-31, which was tabled in Parliament in February 2026. The Commission recommended that states collectively receive 41% of the divisible pool of central taxes — maintaining the same share as awarded by the 15th Finance Commission — thereby preserving horizontal equity between the Centre and states.
A significant departure in the horizontal devolution formula is the inclusion of a new 10% weight assigned to states' GDP contribution, rewarding economic performance alongside equity indicators. The Commission also laid out a fiscal consolidation roadmap: the Central Government must reduce its fiscal deficit to 3.5% of GDP by 2030-31, while states are expected to contain their deficits to 3% of their respective GSDPs.
On grants to local bodies, the Commission recommended ₹4.4 lakh crore for rural local bodies (panchayats) and ₹3.6 lakh crore for urban local bodies (municipalities) over the five-year period, marking a substantial increase over previous awards to strengthen grassroots governance.
The Commission also recommended closure of 308 inactive State Public Sector Enterprises (SPSEs) to rationalise public expenditure and reduce fiscal drag. Notably, it recommended recognising heatwaves and lightning strikes as national disasters, making affected populations eligible for relief funding under the National Disaster Relief Fund (NDRF), a recommendation driven by India's growing climate vulnerability.
For RPSC/RAS aspirants, the Finance Commission is a constitutional body under Article 280, constituted every five years to recommend the distribution of central tax revenues between the Union and states.