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Union Cabinet Approves Terms of Reference for Sixteenth Finance Commission


In a significant development, the Union Cabinet has granted approval for the Terms of Reference (ToR) of the Sixteenth Finance Commission. The commission’s primary mandate is to propose a revenue distribution formula between the Central and State governments for the upcoming five-year period, commencing on April 1, 2026.


GS II: Polity and Governance

Dimensions of the Article:

  1. Major Terms of Reference for 16th Finance Commission
  2. Finance Commission: An Overview

Major Terms of Reference for 16th Finance Commission

The 16th Finance Commission has been tasked with several crucial Terms of Reference:

  • Tax Distribution Recommendation: Proposing the distribution of taxes between the Union Government and the States as per Chapter I, Part XII of the Constitution.
  • Allocation of Tax Shares: Determining the allocation of tax proceeds among the States.
  • Principles for Grants-in-Aid: Establishing principles governing grants-in-aid to the States from the Consolidated Fund of India.
  • Grants-in-Aid Amounts: Specifying the amounts to be provided to the States as grants-in-aid, particularly under Article 275 of the Constitution, for purposes beyond those outlined in the provisos to clause (1) of that article.
  • Enhancing State Funds: Identifying measures to enhance the Consolidated Fund of a State, with the aim of supplementing resources available to Panchayats and Municipalities within the State, based on recommendations made by the State’s own Finance Commission.
  • Review of Disaster Management Financing: Reviewing the current financing structures related to Disaster Management initiatives, including examining funds created under the Disaster Management Act, 2005, and proposing suitable recommendations for improvements or alterations.

Finance Commission: An Overview


  • The Finance Commission is a constitutional body responsible for providing recommendations on the distribution of tax revenues among the Union (Central) and State governments, as well as among the States themselves.


  • It is constituted by the President of India under Article 280 of the Constitution. The Commission is established at the end of every fifth year, or earlier if deemed necessary by the President.


  • Parliament has the authority to determine the qualifications for Commission members and the procedure for their selection. The Finance Commission (Miscellaneous Provisions) Act, 1951, was enacted to address these aspects.

Mandate: The Commission’s main duties include:

  • Recommending the distribution of tax proceeds between the Union and States and among States.
  • Formulating principles for grants-in-aid to States from the Consolidated Fund of India.
  • Identifying measures to enhance the Consolidated Fund of a State to support Panchayats and Municipalities based on State Finance Commission recommendations.
  • Addressing any other matters referred by the President in the interest of sound finance.


  • The Commission comprises a Chairman and four other members appointed by the President.

Qualifications: Members of the Commission have specific qualifications, including:

  • Experience in public affairs (for the Chairman).
  • Qualifications to be appointed as Judges of a High Court.
  • Special knowledge of government finances and accounts.
  • Wide experience in financial matters and administration.
  • Specialized knowledge in economics.


  • Members serve for a duration specified by the President’s order and are eligible for reappointment.

Non-Binding Recommendations:

  • It’s important to note that the recommendations made by the Finance Commission are not binding on the government, but they play a significant role in shaping fiscal policies and resource allocation in India.

-Source: The Hindu

February 2024