The Cabinet chaired by Prime Minister Narendra Modi has approved terms of reference for the 16th Finance Commission which will make recommendations on the distribution of taxes between the Union and States for a period of five years from 1st April, 2026.

The Commission will give its report by 31st October, 2025.

Among the terms of reference for the 16th Finance Commission is that it may review present arrangements on financing Disaster Management initiatives, with reference to the funds constituted under the Disaster Management Act, 2005 (53 of 2005), and make appropriate recommendations thereon.

Announcing the decision of the Government, Information and Broadcasting Minister Anurag Thakur told newspersons today that the Union Cabinet met till late Tuesday night to decide the terms of reference for the Finance Commission.

Article 280 (1) of the Constitution provides for setting up of a Finance Commission to make recommendations on the distribution of net proceeds of taxes between the Union and the States and allocation between the States of respective shares of such proceeds.

The Article also lays down principles for grants-in-aid of the revenues of the States out of the Consolidated Fund of India, and measures needed to supplement the resources of the Panchayats during the award period.

The Terms of Reference for the 16th Finance Commission will be notified in due course of time. The Commission’s recommendations will be accepted by the Government before being enforced.

The 15th Finance Commission was constituted on 27 November, 2017. It made recommendations for six years commencing on 1st April, 2020 through its Interim and Final Reports. The recommendations of the 15th Finance Commission are valid up to financial year 2025-26.

The Terms of Reference for the 16th Finance Commission are that it shall make recommendations on matters, namely:

The distribution between the Union and the States of the net proceeds of taxes which are to be, or may be, divided between them under Chapter I, Part XII of the Constitution and the allocation between the States of the respective shares of such proceeds;

The principles which should govern the grants-in-aid of the revenues of the States out of the Consolidated Fund of India and the sums to be paid to the States by way of grants-in-aid of their revenues under article 275 of the Constitution for the purposes other than those specified in the provisos to clause (1) of that article; and

The measures needed to augment the Consolidated Fund of a State to supplement the resources of Panchayats and Municipalities in the State on the basis of the recommendations made by the Finance Commission of the State.

A Working Group headed by Finance Secretary and Secretary (Expenditure), and comprising Secretary (Economic Affairs), Secretary (Revenue), Secretary (Financial Services); Chief Economic Adviser; Adviser, Niti Aayog, and Additional Secretary (Budget), was set up to assist in formulation of the Terms of Reference.

As part of the consultative process, views and suggestions were sought from State Governments and Union Territories (with legislature) on the Terms and were duly deliberated by the Group.