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Cabinet approves Terms of Reference for 16th Finance Commission

The Union Cabinet has approved Terms of Reference (ToR) for 16th Finance Commission. Commission’s recommendations will be implemented from April 1, 2026 for 5 years.

While giving details about the decision, Union Information & Broadcasting Minister Anurag Singh Thakur said names of the Chairman and Members to be announced later. According to ToR. the Finance Commission shall make recommendations on the distribution between the Union and the States of the net proceeds of taxes which are to be, or may be, divided between them.

It will also suggest the principles which should govern the grants-in-aid of the revenues of the States out of the Consolidated Fund of India and the sums to be paid to the States by way of grants-in-aid of their revenues under article 275 of the Constitution for the purposes other than those specified in the provisos to clause (1) of that article.

Steps to augment funds

ToRs also include the measures needed to augment the Consolidated Fund of a State to supplement the resources of the Panchayats and Municipalities in the State on the basis of the recommendations made by the Finance Commission of the State. The Commission may review the present arrangements on financing Disaster Management initiatives, with reference to the funds constituted under the Disaster Management Act, 2005 (53 of 2005), and make appropriate recommendations thereon, the Minister added.

“The Commission will submit its report by October 31, 2025. Based on the decisions taken by the Central government, recommendations will be implemented for 5 years starting April 1, 2026,” he said.

The Finance Commission is constituted by the President under article 280 of the Constitution, mainly to give its recommendations on distribution of tax revenues between the Union and the States and amongst the States themselves. Two distinctive features of the Commission’s work involve redressing the vertical imbalances between the taxation powers and expenditure responsibilities of the Centre and the States respectively and equalisation of all public services across the States.


The recommendations of the Finance Commission relating to distribution of Union Taxes and Duties and Grants-in-aid fall in this category are implemented by the President. Other recommendations are implemented by executive orders. The First Finance Commission was constituted vide Presidential Order dated November 22, 1951, under the chairmanship of K.C. Neogy on April 6, 1952. Fifteenth Finance Commissions have been Constituted so far at intervals of every five years. 15th Finance Commission was set up under the Chairmanship of N K Singh who recommended 41 per cent from devolution pool of central taxes to States.

The 15th Finance Commission was constituted on November 27, 2017. It made recommendations covering the period of six years commencing on 1st April, 2020 through its Interim and Final Reports. The recommendations of the Fifteenth Finance Commission are valid upto the financial year 2025-26.


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