The Union Cabinet, presided over by Prime Minister Shri Narendra Modi, has given its approval to the Terms of Reference (ToR) for the Sixteenth Finance Commission. These ToRs, to be officially notified soon, will guide the 16th Finance Commission in its recommendations, which are expected to span a five-year period starting from April 1, 2026.
Under Article 280(1) of the Constitution, the Finance Commission is tasked with recommending the distribution of tax proceeds between the Union and the States, allocation of shares among the States, grants-in-aid from the Consolidated Fund of India to the States, and measures required to supplement Panchayat resources during the award period.
The Fifteenth Finance Commission, established on November 27, 2017, provided recommendations for a six-year period starting April 1, 2020, through its Interim and Final Reports. These recommendations will remain valid until the financial year 2025-26.
The Terms of Reference for the Sixteenth Finance Commission include directives related to the division of tax proceeds, principles governing grants-in-aid, measures to strengthen the Consolidated Fund of a State for supporting Panchayats and Municipalities, and reviewing financing arrangements for Disaster Management initiatives. The Commission is expected to present its report by October 31, 2025, covering the subsequent five-year period commencing from April 1, 2026.
Given the extended tenure of recommendations by the Fifteenth Finance Commission, covering until March 31, 2026, the constitution of the 16th FC is initiated to assess and evaluate the finances of the Union and States preceding its recommendation period. This is in line with past instances where earlier Finance Commissions were constituted after a duration longer than the typical five-year interval.
The formulation of the Terms of Reference involved a consultative process that engaged State Governments and Union Territories (with legislature) to gather their views and suggestions. An Advance Cell for the 16th FC was established in the Ministry of Finance, followed by a Working Group comprised of key officials, to assist in devising the Terms of Reference.