What is the 15th Finance Commission?

The 15th Finance Commission was constituted by the Government of India with the President's approval in November 2017, in accordance with Article 280 of the Indian Constitution. Chaired by N.K. Singh, the Commission was tasked with recommending revenue-sharing mechanisms between the Union and state governments, starting from April 1, 2020, with a specific focus on the fiscal years 2021-22 to 2025-26.

The primary objectives of the 15th Finance Commission included strengthening cooperative federalism, enhancing the quality of public spending, and safeguarding fiscal stability across the country. By addressing these goals, it aimed to create a more balanced and equitable financial framework supporting both the Union and state governments in their developmental efforts.

What is the Finance Commission? (Article 280)

The Finance Commission, established under Article 280 of the Indian Constitution, is a constitutional body that periodically defines the financial relationship between the central government and individual state governments. Since the first Commission was formed in 1951, a total of 16 Finance Commissions have been constituted to recommend the distribution of tax revenues and ensure equitable fiscal arrangements. Each Commission operates under specific terms of reference that outline its qualifications, appointments, and powers.

• Article 280: Outlines the Commission's responsibilities, functions, and composition. The President shall establish a Finance Commission within two years of the Constitution's commencement, and every five years thereafter (or sooner if deemed necessary), through an order.
• Composition: The Finance Commission shall include a Chairman and four additional members, all appointed by the President.

15th Finance Commission Recommendations

The 15th Finance Commission, chaired by N.K. Singh, submitted its initial report for the financial year 2020-21 in February 2020 and its final report for the period 2021-26, which was tabled in Parliament on February 1, 2021. Its recommendations covered fiscal allocation, economic effects, and incentives for state governments.

Vertical Devolution

The 15th Finance Commission recommended that the share of states in the central taxes (vertical devolution) for the 2021-26 period be set at 41%.

• Lower than 42%: This figure was lower than the 42% share suggested by the 14th Finance Commission for the 2015-20 period.
• 1% adjustment: The Commission adjusted by 1% to account for the newly formed Union Territories of Jammu & Kashmir and Ladakh being financed from central resources.

Horizontal Devolution

The 15th Finance Commission recommended specific weightage for horizontal devolution (distribution among the states) based on the following criteria:

• Income Distance (45%): The gap between a state's income and that of the state with the highest income. States with lower per capita income receive a larger share to promote equity.
• Demographic Performance (12.5%): Evaluated using the 2011 population data, as mandated by the Terms of Reference. States with a lower fertility rate — reflecting efforts in population control — score higher.
• Area (15%): A larger area increases the expenditure requirement to provide similar services effectively.
• Population (15%): Based on the 2011 census; indicates the demand for resources to serve residents.
• Forest and Ecology (10%): Assessed as the proportion of a state's dense forest area relative to the total dense forest across all states, reflecting the importance of ecological preservation.
• Tax and Fiscal Efforts (2.5%): Acknowledges states with greater efficiency in tax collection — measured as the ratio of average per capita own tax revenue to average per capita state GDP over 2016-17 to 2018-19.

15th Finance Commission — Grants

The 15th Finance Commission established a comprehensive framework for grants-in-aid to the states for 2021-26, addressing revenue deficits, enhancing sector-specific programmes, and strengthening local governance.

• Revenue Deficit Grant: Intended to address the fiscal needs of states remaining unmet after their own tax and non-tax resources and tax devolution. In 2021-22, the Commission proposed revenue deficit grants for 17 states.
• Sector-Specific Grants: Allocated across eight areas — health, school education, higher education, agricultural reforms, maintenance of PMGSY roads, judiciary, statistics, and aspirational districts and blocks. A portion was linked to performance outcomes.
• Grants to Local Bodies: A significant allocation with a performance-linked component, focused on rural and urban initiatives and health-related projects. Non-health grants were to be distributed based on population and area, with weightage of 90% and 10% respectively. To access funds, states had to meet criteria such as publishing audited accounts and setting minimum property tax rates.
• Disaster Risk Management: The Commission recommended retaining the existing cost-sharing arrangements — a 90:10 ratio for north-eastern and Himalayan states, and a 75:25 ratio for all other states.

Fiscal Roadmap

The 15th Finance Commission proposed a fiscal roadmap aimed at reducing the fiscal deficit to 4% of GDP for the Centre by 2025-26. It also established a phased reduction for states — 4% in 2021-22, 3.5% in 2022-23, and 3% from 2023-26. Key recommendations included:

• Review of the FRBM Act: Forming a high-level inter-governmental group to review the Fiscal Responsibility and Budget Management (FRBM) Act, propose a revised framework for the Centre and states, and oversee its implementation.
• Utilisation of Borrowing Limits: States that did not fully utilise their sanctioned borrowing limits within the first four years should carry forward the unutilised amount.
• Extra Borrowing for Power Sector Reforms: Additional borrowing of 0.5% of GSDP for states that implement power sector reforms.
• Decrease in Total Liabilities: A projected fall in total liabilities for the Centre from 62.9% of GDP in 2020-21 to 56.6% by 2025-26, and for states from 33.1% to 32.5%.
• Revenue Mobilisation: Strengthening income and asset-based taxation.
• GST Challenges: Addressing the inverted duty structure in GST and rationalising the rate structure.
• Independent Fiscal Council: Establishing an independent Fiscal Council to oversee public financial management.
• Harmonising Fiscal Responsibility Laws: States to align their fiscal responsibility laws with those of the Centre.

Other Recommendations

• Health: States to allocate over 8% of their budgets to health by 2022, with two-thirds of total health expenditure on primary healthcare. Emphasis on flexibility in centrally sponsored health schemes focusing on outcomes rather than inputs; recommended establishing an All India Medical and Health Service.
• Defence and Internal Security: Creating a non-lapsable fund to support modernisation efforts.
• Centrally-Sponsored Schemes (CSS): Setting a minimum funding threshold for CSS and phasing out those with limited impact; regular third-party reviews and stable, transparent funding patterns.
• Education: Grants of ₹4,800 crore from 2022-23 to 2025-26 for incentivising states to enhance educational outcomes.
• Agriculture: A performance-based incentive of ₹45,000 crore for states undertaking agricultural reforms.

Value Addition — The 16th Finance Commission (2026-31)

Since the 15th FC's award period ended on 31 March 2026, the 16th Finance Commission now governs Centre-state fiscal relations from 1 April 2026. This is the single most important update for the current exam cycle.

• Chair & timeline: Chaired by Dr. Arvind Panagariya (former NITI Aayog Vice-Chairman); constituted on 31 December 2023, submitted its report to President Droupadi Murmu on 17 November 2025, and was tabled in Parliament on 1 February 2026 alongside the Union Budget 2026-27.
• Vertical devolution held at 41%: The 16th FC retained the states' share at 41% (unchanged from the 15th FC), despite states demanding a rise to 50%.
• New horizontal criterion: It removed the "tax and fiscal effort" parameter and introduced a new "Contribution to GDP" (10% weight) — rewarding economic output. It also redefined demographic performance (population growth 1971-2011 instead of TFR) and broadened the forest parameter.
• Bigger shift: A move from "entitlement-based" transfers to "compliance-driven" fiscal federalism — capping state fiscal deficits at 3% of GSDP, ending off-budget borrowings, and pushing DISCOM privatisation.

The Finance Commission is the constitutional balancing wheel of Indian federalism — every five years, it redraws the line between what the Union keeps and what the states receive. — Legacy IAS Faculty

15th Finance Commission — UPSC Previous Year Questions

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