State Share Fixed at 41% for 2026‑31 Period The Sixteenth Finance Commission (FC‑16) recommended that states’ share of the divisible pool remain at 41 percent for the five‑year span 2026‑31, tabled on Sunday, 2 February 2026 [1]. This figure matches earlier expectations despite state governments lobbying for a rise to 50 percent to boost fiscal capacity [1]. The recommendation is documented in the commission’s report and reflects a continuation of the devolution level set by the previous commission [1].

GST Framework Tightens State Fiscal Space FC‑16 observes that the Goods and Services Tax regime has squeezed state finances, creating a widening gap between expenditure responsibilities and assured revenues [1]. Many states now rely on market borrowings as the primary adjustment mechanism [1]. The assessment underscores pressure on state budgets even as central tax collections have grown [1].

Horizontal Allocation Formula Shifted Toward GDP Contribution The commission replaced the earlier “tax effort” criterion with a broader “contribution to GDP” measure, raising its weight from 2.5 percent under FC‑15 to 10 percent [1]. This change aims to reward states that generate higher economic output and demonstrate efficient governance [1]. The new weighting seeks to link fiscal transfers more directly to productivity outcomes [1].

Industrialised States See Modest Gains Amid Phased Redistribution FC‑16 stresses that any alteration of the horizontal devolution must be phased to avoid abrupt shocks for transfer‑dependent states [1]. Consequently, the weight given to demographic performance has been reduced, while the weight for population size has been modestly increased [1]. As a result, industrialised states such as Tamil Nadu and Maharashtra receive only incremental improvements in their inter‑state shares [1].

Union Transfers to Grow 12.2% in 2026‑27 Budget Total transfers from the Union budget to states are projected to increase by 12.2 percent between the 2025‑26 revised estimate and the 2026‑27 budget estimate [1]. About ₹1.2 lakh crore—roughly 42 percent of the increase—will come from revenue transfers under Centrally Sponsored Schemes [1]. This reinforces a model where states implement priorities set in New Delhi [1].

Cesses and Surcharges Remain Outside Divisible Pool The commission flags that the effective divisible pool is shrinking because cesses and surcharges are excluded, but it stops short of recommending their inclusion [1]. This omission limits the potential expansion of the pool available for state devolution [1]. Critics argue that without structural changes, fiscal federalism will remain imbalanced [1].