States’ devolution at 41%; South’s share up, Pg1

Key Highlights:

• The 16th Finance Commission (FC) recommended maintaining the 41% share of tax devolution to States, in effect since 2021.
• Finance Minister Nirmala Sitharaman announced the Centre's acceptance of this recommendation in her Budget speech.
• The Centre will provide ₹1.4 lakh crore to States for FY 2026-27 as Finance Commission Grants, including funds for Rural and Urban Local Bodies and Disaster Management.
• The formula for dividing the States' share has been adjusted, increasing the share for five Southern States: Tamil Nadu, Kerala, Andhra Pradesh, Telangana, and Karnataka.
• The 16th FC submitted its report to the President on November 17, 2025, which was then presented in Parliament.

Detailed Insights:

• The 16th FC noted that its share in the divisible pool was the only instrument available to assist the Centre's finances.
• The report indicated limited scope to reduce the States' share in the divisible pool due to the Centre's cesses and surcharges reducing the pool size.
• The divisible pool decreased from 89.1% of gross tax revenues in 2014-15 to between 74%-80% during the 2020-24 period.
• Under the new formula, population now accounts for 17.5% of the weightage, up from 15%, while demographic performance has a lower weightage of 10%.
• The weightage for the area of the State has been reduced to 10%, and the State's per capita GSDP difference now has a weightage of 42.5%.
• As a result of the adjusted formula, Andhra Pradesh, Karnataka, Kerala, Tamil Nadu, and Telangana will receive increased shares of the devolved amount.

Key Concepts Involved:

• Tax Devolution: The distribution of tax revenue between the central and state governments.
• Divisible Pool: The portion of the central government's gross tax revenue that is shared with the states.
• Finance Commission: A constitutional body that recommends principles governing the distribution of tax revenues between the Centre and States.