The constitutional basis
Article 280 of the Constitution requires the President to constitute a Finance Commission every five years. The Commission recommends the share of central taxes that should go to states (the vertical devolution) and how that share should be distributed among states (the horizontal devolution).
Vertical devolution: 41%
The Sixteenth Finance Commission fixed the states' share at 41% of the divisible pool — the pool of all central taxes excluding cesses and surcharges.
Note: cesses and surcharges (like the health and education cess) are excluded from the divisible pool entirely. States have repeatedly flagged this as a mechanism that effectively reduces their share. Cesses have grown from ~3% of gross tax revenue in 2011-12 to over 10% in recent years.
Horizontal formula: how states' shares are computed
The 16th FC used these weights:
| Criterion | Weight | |-----------|--------| | Income distance | 45% | | Population (2011) | 15% | | Area | 15% | | Demographic performance | 12.5% | | Forest and ecology | 10% | | Tax effort | 2.5% |
Income distance is the most important criterion. It is computed as the distance of each state's per-capita GSDP from the state with the highest per-capita GSDP (Goa). Poorer states score higher on this criterion.
Demographic performance rewards states that controlled population growth (lower fertility ratio). This was introduced partly to address the concern that southern states were penalised for successfully implementing family planning.
Data sources
- State shares: Statement of Devolution, Union Budget 2026-27
- Population data: Census 2011 (2021 census not yet published as of budget date)
- Per-capita GSDP: National Statistical Office
- Formula weights: 16th Finance Commission report (to be published; current figures based on pre-release recommendations)