Finance Commission
Indian Polity & Governance
- PYQs8
- Articles1
Background
The Finance Commission is a crucial constitutional body whose recommendations significantly shape India's fiscal federalism, impacting Centre-State financial relations, state finances, and public service delivery across the country. Its role in addressing fiscal imbalances and promoting equity is central to governance.
The Finance Commission (FC), constituted under Article 280 of the Constitution, is a quasi-judicial body that determines the distribution of the Union’s gross tax revenues between the Centre and States (vertical devolution) and among the States themselves (horizontal devolution) to address fiscal imbalances.
Facts & tables
- Constitutional Mandate
- Established under Article 280 of the Indian Constitution.
- Primary Function
- Recommends vertical (Centre-States) and horizontal (among States) devolution of taxes.
- Objective
- Addresses fiscal imbalances and promotes equity in resource distribution.
- 16th FC Recommendations
- Retained 41% vertical share for States and adjusted horizontal devolution criteria, including new demographic and GSDP-based factors.
| Criterion | Weight (%) |
|---|---|
| Income Distance | 42.5 |
| Population | 17.5 |
| Area | 10 |
| Forest Cover | 10 |
| Demographic Criterion (Population Growth) | 10 |
| States’ contribution to national GDP (square-root transformed) | 10 |
| Type | Reference |
|---|---|
| Conceptual area | Indian Polity & Governance |
| Conceptual area | Indian Economy |
| Body | Role |
|---|---|
| Finance Commission | Recommends fiscal transfers |
Prelims angle
Prelims angle: Factual recall
Prelims angle: Institutional roles and functions
- Constitutional body (Art 280) for fiscal transfers.
- Recommends vertical (Centre-States) and horizontal (among States) tax devolution.
- Aims to correct fiscal imbalances and promote equity.
- 16th FC maintained 41% vertical share, adjusted horizontal criteria.
- Impacts state fiscal autonomy and public service delivery.
| Year | Framing tags |
|---|---|
| 2025 | Multi-statement analysis, Institutional roles and functions |
| 2025 | Multi-statement analysis, Factual recall |
| 2023 | Factual recall, Institutional roles and functions |
| 2022 | Multi-statement analysis, Institutional roles and functions |
| 2018 | Multi-statement analysis, Institutional roles and functions |
| 2017 | Multi-statement analysis, Factual recall |
| 2015 | Multi-statement analysis, Factual recall |
| 2014 | Factual recall, Institutional roles and functions |
Timeline
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Indian Polity & Governance
Conceptual area
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Indian Economy
Conceptual area
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Prelims 2014
Factual recall, Institutional roles and functions
-
Prelims 2015
Multi-statement analysis, Factual recall
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Prelims 2017
Multi-statement analysis, Factual recall
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Prelims 2018
Multi-statement analysis, Institutional roles and functions
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Prelims 2022
Multi-statement analysis, Institutional roles and functions
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Prelims 2023
Factual recall, Institutional roles and functions
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Prelims 2025
Multi-statement analysis, Institutional roles and functions
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Prelims 2025
Multi-statement analysis, Factual recall
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Finance Commission transfers and equity issue
The Finance Commission is a constitutional body that recommends the distribution of tax revenues between the Union and States, and among States, playing a pivotal role in India's fiscal federalism and addressing fiscal imbalances.
See also
Past papers
2014–2025 · 8 questions
In the news
Finance Commission transfers and equity issue
The Finance Commission is a constitutional body that recommends the distribution of tax revenues between the Union and States, and among States, playing a pivotal role in India's fiscal federalism and addressing fiscal imbalances.
Try these PYQs
Consider the following:
1. Demographic performance
2. Forest and ecology
3. Governance reforms
4. Stable government
5. Tax and fiscal efforts
For the horizontal tax devolution, the Fifteenth Finance Commission used how many of the above as criteria other than population area and income distance?
Based on principles of need, equity and performance, overall devolution formula is as given in the chart:
Which of the following statements with regard to recommendations of the 15th Finance Commission of India are correct?
I. It has recommended grants of ₹4,800 crores from the year 2022–23 to the year 2025–26 for incentivizing States to enhance educational outcomes.
II. 45% of the net proceeds of Union taxes are to be shared with States.
III. ₹45,000 crores are to be kept as performance-based incentive for all States for carrying out agricultural reforms.
IV. It reintroduced tax effort criteria to reward fiscal performance.
Select the correct answer using the code given below.
The 15th Finance Commission made recommendations to promote better fiscal discipline, education, and agriculture reforms, while adjusting tax devolution among states. ✅ Statement I: Correct 4,800 crores were recommended (2022–23 to 2025–26) to incentivize states for improving educational outcomes. ❌ Statement II: Incorrect The Commission recommended 41% of Union taxes to be shared with states, not 45%. ✅ Statement III: Correct It proposed a ₹45,000 crore performance-based incentive for states to implement agricultural reforms. ✅ Statement IV: Correct It reintroduced the 'tax effort' criterion, rewarding states that better mobilize revenue in relation to their GSDP.
With Reference to the Fourteenth Finance Commission, which of the following statements is/are correct?
1. It has increased the share of States in the central divisible pool from 32 per cent to 42 per cent
2. It has made recommendations concerning sector-specific grants
Statement 1 is Correct: The Fourteenth Finance Commission indeed increased the devolution of tax revenue from the central government to the states. Statement 2 is Incorrect: While promoting formula-based devolution, the commission does not provide recommendations regarding sector-specific grants to ensure focus on critical areas.
Which of the following are associated with ‘Planning’ in India?
1. The Finance Commission
2. The National Development Council
3. The Union Ministry of Rural Development
4. The Union Ministry of Urban Development
5. The Parliament
Select the correct answer using the code given below.
1. Finance Commission: Deals with the distribution of tax revenue between the central government and states, not overall national planning. 2. National Development Council (NDC): This was the apex body for planning at the national level. It is used to formulate and review India's five-year plans. 3. Union Ministry of Rural Development: Implements specific development schemes related to rural areas, not national-level planning. 4. Union Ministry of Urban Development: Implements specific development schemes related to urban areas, not national-level planning. 5. Parliament: While not directly involved in day-to-day planning, the Parliament is used to approve the five-year plans formulated by the NDC. Additionally, Members of Parliament (MPs) can utilize funds allocated for their constituencies through MPLADS (Member of Parliament Local Area Development Scheme), which contributes to local-level planning.
Consider the following statements:
1. The Election Commission of India is a five-member body.
2. Union Ministry of Home Affairs decides the election schedule for the conduct of both general elections and by-elections.
3. Election Commission resolves the disputes relating to splits/mergers of recognized political parties.
Which of the statements given above is/are correct?
Statement 1 is incorrect: The Election Commission of India (ECI) is not a five-member body. It is a three-member body, consisting of the Chief Election Commissioner (CEC) and two Election Commissioners (ECs). However, it originally started as a single-member body in 1950 and became a multi-member commission in 1993. Statement 2 is incorrect: The Union Ministry of Home Affairs (MHA) does not decide the election schedule. The Election Commission of India (ECI) is solely responsible for determining the schedule of general elections and bye-elections. It exercises this power under Article 324 of the Constitution, ensuring free and fair elections in the country. Statement 3 is correct: The Election Commission of India has the authority to resolve disputes related to splits and mergers of recognized political parties. It decides which faction of a party is the legitimate one and, if necessary, allocates party symbols accordingly, based on precedents and internal party strength. Hence, the correct answer is option (D) 3 only.
Show 3 more PYQs
With reference to the Government of India, consider the following information:
| Organization | Some of its Functions | It Works Under |
|--------------------|------------------------|--------------------------------|
| Directorate of Enforcement | Enforcement of the Fugitive Economic Offenders Act, 2018 | Internal Security Division-I, Ministry of Home Affairs |
| Directorate of Revenue Intelligence | Enforces the provisions of the Customs Act, 1962 | Department of Revenue, Ministry of Finance |
| Directorate General of Systems and Data Management | Carrying out big data analytics to assist tax officers for better policy and nabbing tax evaders | Department of Revenue, Ministry of Finance |
In how many of the above rows is the information correctly matched?
The question relates to the correct mapping of key investigative and analytical bodies under the Government of India and their parent ministries or departments. ❌ Row I: Incorrect The Directorate of Enforcement does implement the Fugitive Economic Offenders Act, 2018, but it functions under the Department of Revenue, Ministry of Finance, not the Ministry of Home Affairs. ✅ Row II: Correct The Directorate of Revenue Intelligence (DRI) enforces the Customs Act, 1962 and works under the Department of Revenue, Ministry of Finance. ✅ Row III: Correct The Directorate General of Systems and Data Management aids in big data analytics for tax enforcement and operates under the Department of Revenue, Ministry of Finance.
Consider the following statements:
1. The India Sanitation Coalition is a platform to promote sustainable sanitation and is funded by the Government of India and the World Health Organization.
2. The National Institute of Urban Affairs is an apex body of the Minister of Housing and Urban Affairs in Government
of India and provides innovative solutions to address the challenges of Urban India.
Which of the statements given above is/are correct?
Statement 1 is incorrect. The India Sanitation Coalition was launched on June 25, 2015, at FICCI, New Delhi. ISC is a multi-stakeholder platform that brings together the private sector, government, financial institutions, civil society groups, media, donors/bilateral/multilateral, experts, etc., to work in the sanitation space to drive sustainable sanitation through a partnership model. It is not funded by WHO. Statement 2 is incorrect. The National Institute of Urban Affairs (NIUA) is India’s premier urban think tank, shaping the urban narrative since its establishment in 1976, it not an apex body. It is an autonomous body under the Societies Registration Act.
How is the National Green Tribunal (NGT) different from the Central Pollution Control Board (CPCB)?
1. The NGT has been established by an Act whereas the CPCB has been created by executive order of the Government.
2. The NGT provides environmental justice and helps reduce the burden of litigation in the higher courts whereas the CPCB promotes cleanliness of streams and wells, and aims to improve the quality of air in the country.
Which of the statements given above is/are correct
Statement 1 is incorrect: The National Green Tribunal (NGT) was established under the National Green Tribunal Act, 2010, passed by Parliament, making it a statutory body. Similarly, the Central Pollution Control Board (CPCB) was constituted under the Water (Prevention and Control of Pollution) Act, 1974 and is also a statutory body. It plays a key role in environmental regulation in India. Statement 2 is correct: The NGT’s primary role is to ensure the expeditious disposal of environmental cases related to forest conservation, natural resource protection, and pollution control, thereby reducing the burden on higher courts. The CPCB, functioning under the Ministry of Environment, Forest and Climate Change (MoEFCC), is responsible for monitoring water and air quality, implementing pollution control measures, and enforcing environmental laws to promote a cleaner environment. Thus, while both bodies deal with environmental protection, the NGT focuses on adjudication, whereas the CPCB handles regulatory and enforcement functions.
Therefore, the correct answer is option (b) 2 only.