Finance Commission Devolution: How Funds Are Shared Between Centre and States

Every five years or so, a constitutionally mandated body called the Finance Commission decides exactly what share of India’s central tax revenue gets passed on to states, and by what formula it gets divided among them. This article explains how that process works and the recurring regional dispute it has generated.

What the Finance Commission Does

The Finance Commission is a constitutional body, reconstituted roughly every five years, tasked with recommending how the divisible pool of central tax revenue should be shared between the Union government and the states, a two-part decision involving both the overall vertical devolution share, how much of the total pool states collectively receive, and the horizontal distribution formula, how that collective share gets divided among individual states based on a weighted set of criteria.

The 15th Finance Commission’s 2021-26 Award

The 15th Finance Commission, chaired by N.K. Singh, recommended a 41 percent vertical devolution share for states for the 2021-26 period, according to Accountability Initiative’s analysis of the award, a figure slightly reduced from the 14th Finance Commission’s 42 percent specifically to account for Jammu and Kashmir’s conversion from a state into a union territory, since union territories don’t receive devolution through this same mechanism. For horizontal distribution among individual states, the 15th Commission’s formula weighted population based on 2011 census figures at 15 percent, income distance, a measure of how far a state’s per-capita income falls below the wealthiest state, at 45 percent, area at 15 percent, forest and ecology at 10 percent, demographic performance at 12.5 percent, and tax effort at 2.5 percent, according to Vajiram & Ravi’s breakdown of the formula.

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The 16th Finance Commission’s Progress Toward the 2026-31 Award

The 16th Finance Commission, chaired by economist Arvind Panagariya, was appointed in December 2023 specifically to determine the devolution framework for the subsequent 2026-31 period, according to Business Standard’s coverage of his appointment. The Commission’s tenure was subsequently extended to November 30, 2025, and it formally submitted its completed report to President Droupadi Murmu around November 17, 2025, according to Civilsdaily’s tracking of the submission, with the report expected to be tabled in Parliament along with the government’s Action Taken Report ahead of the 2026-27 fiscal year in which its new recommendations would take effect.

The Southern States’ Recurring Complaint

Throughout both the 15th Commission’s process and the 16th Commission’s more recent deliberations, southern states, including Tamil Nadu, Kerala, Karnataka, Andhra Pradesh, and Telangana, have repeatedly raised a specific, recurring objection to the population-weighting element of the horizontal distribution formula. Their argument, detailed in IndiaSpend’s explainer on the dispute, holds that using 2011 census population figures effectively penalises states that successfully implemented family planning programmes decades earlier, since their population growth slowed more than in several northern states, meaning their population share of India’s total has shrunk relative to states with less successful family-planning track records, a dynamic that reduces their devolution share under a population-weighted formula even though these states argue they contribute disproportionately to India’s GDP and overall tax collection.

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What Southern States Have Specifically Demanded

Beyond simply raising the objection, southern states have pushed concrete demands at forums including the Southern Zonal Council and in formal submissions to the 16th Finance Commission, with some coverage, including reporting by Cogencis, describing demands for devolution shares as high as 50 to 60 percent overall, alongside calls for the formula to place greater weight on income distance and fiscal effort criteria rather than population, changes that would generally favour states with stronger existing tax bases and lower relative population growth over the census period used in the calculation.

The Connection to the Delimitation Debate

This devolution dispute is closely intertwined with a separate but related concern among the same states regarding India’s pending delimitation exercise, the periodic redrawing of parliamentary constituency boundaries and seat allocations based on population, since southern politicians worry, according to the same IndiaSpend coverage, that the same population dynamics reducing their Finance Commission devolution share could similarly reduce their proportional representation in the Lok Sabha once delimitation based on more recent population figures eventually proceeds, a connected concern covered in more depth in our dedicated article on the southern states’ delimitation worries.

Bottom Line

The Finance Commission, most recently the 15th Commission with its 41 percent devolution share for 2021-26 and now the 16th Commission under Arvind Panagariya, which submitted its report for the 2026-31 period in November 2025, determines how India’s central tax revenue is shared with states, a process that has repeatedly drawn objections from southern states arguing the population-weighted portion of the distribution formula penalises them for successful family planning even as they contribute disproportionately to national tax revenue, a grievance closely linked to their broader, separate concern about losing parliamentary representation once delimitation eventually proceeds.

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Abhyudaya Verma