The
16th Finance Commission has kept states’ share in the divisible tax pool unchanged at 41 per cent for the five-year period from 2026–27 to 2030–31.
While the overall pool remains the same, the Commission has redesigned the formula used to decide how much each state gets. This has resulted in gains for several industrialised and economically stronger states, many of them in the south and west, while larger and poorer northern states see a relative dip in their shares.
Why did states demand a higher share and why did the Centre say no?
In their submissions, 18 of India’s 28 states had strongly argued that their share in central taxes should be raised from 41 per cent to 50 per cent. The Commission, however, rejected this demand.
It pointed out that “states already account for more than two-thirds of the nation’s total non-debt revenues” and said a higher share would limit the Centre’s ability to fund national priorities.
Which states gain the most?
Karnataka saw the biggest rise in its share, followed by Kerala, Gujarat and Haryana.
Karnataka saw the biggest rise in its share of central tax devolution in the Budget Estimates for FY27, emerging as the top gainer among states. Its share rose to 4.13 per cent in FY27 from 3.64 per cent in the Revised Estimates of FY26, an increase of 0.48 percentage points. Karnataka’s share in central taxes increased to ₹63,049.58 crore from ₹50,801.65 crore a year earlier.
Kerala followed closely, with its share rising by 0.45 percentage points to 2.38 per cent in FY27, up from 1.92 per cent in FY26 (RE). This translated into a jump in tax devolution to ₹36,355.39 crore, compared with ₹26,814.70 crore earlier.
Gujarat also recorded a notable increase, with its share climbing from 3.47 per cent to 3.75 per cent, a rise of 0.27 percentage points. The state’s share in central taxes increased to ₹57,310.86 crore in FY27 from ₹48,447.57 crore in FY26 (RE).
Haryana, too, saw a significant improvement. Its share rose by 0.26 percentage points to 1.361 per cent, up from 1.09 per cent in the previous year. In value terms, Haryana’s allocation increased to ₹20,772.32 crore from ₹15,225.18 crore.
Which states saw a dip in their share?
In contrast, populous northern states such as Uttar Pradesh, Bihar, Rajasthan and central state Madhya Pradesh witnessed a relative decline in their share of tax devolution.
Uttar Pradesh, the largest recipient in value terms, saw its share fall by 0.32 percentage points to 17.61 per cent in FY27, from 17.93 per cent in FY26 (RE). However, the amount allocated to the state still rose to ₹268,910.76 crore, up from ₹249,885 crore.
Bihar’s share dipped marginally by 0.11 percentage points, declining to 9.94 per cent from 10.05 per cent. Despite this, its tax devolution increased in absolute terms to ₹151,831.80 crore, compared with ₹140,105.01 crore earlier.
Rajasthan saw its share edge down by 0.10 percentage points to 5.92 per cent in FY27 from 6.02 per cent in FY26 (RE). The state’s allocation, however, rose to ₹90,445.85 crore from ₹83,940.45 crore.
Madhya Pradesh recorded the sharpest fall among these states, with its share dropping by 0.50 percentage points to 7.34 per cent, from 7.85 per cent a year ago. Still, the amount it received increased slightly to ₹112,133.93 crore, up from ₹109,348.21 crore.
What changes were made to the devolution formula?
Along with adding GDP contribution, the Commission made several other adjustments:
• Removed the 2.5 per cent weight given to states’ tax efforts
• Increased the weight of population by 2.5 percentage points
• Reduced the weight given to area, demographic performance and per capita GSDP distance
Per capita GSDP distance measures how far a state’s income level falls below a benchmark set by the average of the top three richest states, helping poorer states get more funds.
GDP contribution added to formula
A major change in this Finance Commission is the inclusion of a state’s contribution to national GDP as a new factor in the horizontal devolution formula. This parameter has been given a weight of 10 per cent.
Instead of state-specific or sector-specific grants, the panel has earmarked ₹7.91 trillion for rural and urban local bodies during 2026–31, split 60:40 between rural and urban areas. The focus will be on water, sanitation and urban infrastructure. It has also recommended ₹2.04 trillion for state disaster response and mitigation funds, along with around ₹79,000 crore for national disaster funds, based on a revamped disaster risk index.
 "16th Finance Commission: Which states gain and lose under new tax formula")
