Finance Commission of India
(Article 280)
Table of Contents
- Introduction
- Constitutional Basis
- Composition
- Appointment, Tenure & Removal
- Qualifications & Eligibility
- Functions of the Finance Commission
- Types of Recommendations
- Criteria Used for Tax Devolution
- Grants-in-Aid
- Finance Commission Reports (1st to 15th) — Highlights
- Relationship with Planning Commission / NITI Aayog
- Importance of Finance Commission
- Limitations
- Summary
1. Introduction
The Finance Commission is a constitutional body responsible for recommending how revenue should be divided between the Union and the States.
It promotes fiscal federalism, ensuring balanced financial relations.
India’s financial federalism largely works through:
- Tax sharing
- Grants
- Recommendations of the Finance Commission
2. Constitutional Basis
Finance Commission is established under:
Article 280
President constitutes a Finance Commission every 5 years or earlier if necessary.
Article 281
President lays Commission’s recommendations before Parliament with an action taken report.
Location in Constitution:
- Part XII – Finance, Property, Contracts & Suits
3. Composition
The Commission consists of:
- One Chairman
- Four Members
Appointed by: President of India
4. Appointment, Tenure & Removal
Tenure
- Usually 5 years (not fixed in the Constitution)
- Can be dissolved earlier or extended by the President
Removal
- President may remove members on grounds of:
- Insolvency
- Misbehavior
- Mental or physical incapacity
- Interest in government contracts
5. Qualifications & Eligibility
Parliament has specified qualifications for members:
Members must be persons with experience in:
- Public affairs
- Finance and economics
- Government accounts
- Administration
- Public finance or related fields
Chairman is typically:
- A retired judge, IAS officer, economist, or senior administrator.
6. Functions of the Finance Commission
(Article 280(3))
Mandatory Functions
- Distribution of net tax proceeds between Union and States (vertical devolution).
- Allocation among States of their share (horizontal devolution).
- Principles for grants-in-aid from Union to States (Article 275).
- Measures to improve state finances and fiscal stability.
- Review of Consolidated Funds of states to supplement Panchayats and Municipalities (Article 280(3)(bb),(c)).
Additional Functions
President may assign additional tasks like:
- Reviewing disaster management funding
- Special grants
- Fiscal consolidation
7. Types of Recommendations
A. Tax Devolution
Percentage of Union taxes to be distributed to states.
B. Grants-in-Aid
- Revenue deficit grants
- Special area grants
- Tribal and hill area grants
- Local body grants
C. Disaster Management Funding
- National Disaster Response Fund (NDRF)
- State Disaster Response Fund (SDRF)
D. Performance-based grants
For:
- Tax effort
- Judiciary reforms
- Ease of doing business
- Power sector reforms
8. Criteria Used for Tax Devolution
(Varies by Commission; typical criteria below)
Examples used by 15th Finance Commission:
| Criterion | Weightage |
|---|---|
| Income Distance | 45% |
| Population (2011 Census) | 15% |
| Area | 15% |
| Forest & Ecology | 10% |
| Tax Effort | 2.5% |
| Demographic Performance | 12.5% |
Income distance = poorer states receive higher share.
9. Grants-in-Aid (Article 275)
Types:
(A) Revenue Deficit Grants
For states with budget gaps.
(B) Local Body Grants
- Rural (Panchayats)
- Urban (Municipalities)
(C) Disaster Management Grants
(D) Sectoral Grants
For:
- Health
- Education
- Agriculture
- Judiciary
(E) Special Grants
For:
- Hilly states
- Border states
- Newly formed states
10. Finance Commission Reports — Key Highlights
1st Finance Commission (1951)
- Laid foundation of tax distribution.
7th Commission
- Introduced formula approach for devolution.
10th Commission
- Introduced “income distance” formula prominently.
12th Commission
- Focus on fiscal consolidation.
14th Finance Commission (2015–20)
- Increased states’ share from 32% to 42%
- Strengthened state autonomy.
- Reduced centrally sponsored schemes.
15th Finance Commission (2021–26)
- States’ share 41% (reduced due to UT of J&K reorganization).
- Performance-based grants.
- Focus on defense and national security funding.
- Disaster management reforms.
11. Relationship with Planning Commission / NITI Aayog
Earlier
- Finance Commission + Planning Commission led to overlapping roles.
- FC: tax sharing & grants
- Planning Commission: plan grants & project funding
After 2015
- Planning Commission abolished
- NITI Aayog created
- Finance Commission became more important as the primary fiscal arbiter
12. Importance of the Finance Commission
- Ensures fiscal federalism
- Reduces vertical and horizontal imbalances
- Promotes financial stability
- Encourages accountability and transparency
- Strengthens local governance through grants
- Provides objective, data-driven recommendations
- Maintains balance between Union and State needs
13. Limitations
- Recommendations are advisory, not binding
- Union often dominates financial space
- States depend heavily on central transfers
- Overlap with GST Council on tax matters
- Political influences
- Limited powers to enforce compliance
- Not a permanent body
14. Summary
- Finance Commission is a constitutional body (Art. 280) formed every 5 years.
- Advises on tax devolution, grants-in-aid, and fiscal stability.
- Composition: Chairman + 4 Members, appointed by the President.
- Its recommendations shape India’s financial federalism.
- 14th and 15th Finance Commissions have significantly restructured Union–State financial relations.
- Plays a crucial role in equitable development and balanced resources distribution.