Finance Commission and Grants to Local Bodies
Indian Polity & Governance
- PYQs8
- Articles1
Background
Essential for understanding fiscal federalism, the financial autonomy of local self-governments, the role of constitutional bodies, and challenges in the devolution of funds.
The Finance Commission, a constitutional body established under Article 280, plays a crucial role in India's fiscal federalism by recommending the distribution of tax revenues and grants-in-aid from the Consolidated Fund of India to states and local bodies (Panchayats and Municipalities), thereby ensuring financial support for decentralized governance.
Facts & tables
- Constitutional Basis
- Established under Article 280 of the Indian Constitution.
- Primary Function
- Recommends grants-in-aid to states for augmenting the Consolidated Fund of a State to supplement the resources of Panchayats and Municipalities.
- Nature of Recommendations
- Recommendations are laid before Parliament and cannot be altered once accepted by the Government.
- Grant Conditions
- Release of grants is often conditional on states/local bodies fulfilling prescribed eligibility criteria.
| State | Allocation (Rs. Cr) | Released (Rs. Cr) | Not Released (Rs. Cr) |
|---|---|---|---|
| Andhra Pradesh | 10231.00 | 10055.82 | 175.18 |
| Karnataka | 12539.00 | 8688.89 | 3850.11 |
| Uttar Pradesh | 38012.00 | 38012.00 | 0.00 |
| Type | Reference |
|---|---|
| Conceptual area | Indian Polity & Governance |
| Conceptual area | Public Finance & Taxation |
| Body | Role |
|---|---|
| Finance Commission | Recommends |
| Ministry of Panchayati Raj | Monitors implementation |
| State Governments | Implements conditions |
| Rural Local Bodies | Receives funds |
Prelims angle
Prelims angle: Multi-statement analysis
Prelims angle: Factual recall
- FC is a constitutional body (Art 280).
- Recommends grants to states for local bodies.
- Grants are conditional on eligibility.
- Aims to strengthen local self-government finances.
- Recommendations are binding once accepted.
Check if created by Constitution or by Parliament.
| Year | Framing tags |
|---|---|
| 2025 | Multi-statement analysis, Factual recall |
| 2025 | Multi-statement analysis, Institutional roles and functions |
| 2025 | Multi-statement analysis, Factual recall |
| 2023 | Multi-statement analysis, Conceptual understanding |
| 2023 | Factual recall, Institutional roles and functions |
| 2022 | 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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Public Finance & Taxation
Conceptual area
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Prelims 2014
Factual recall, Institutional roles and functions
-
Prelims 2015
Multi-statement analysis, Factual recall
-
Prelims 2022
Multi-statement analysis, Factual recall
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Prelims 2023
Multi-statement analysis, Conceptual understanding
-
Prelims 2023
Factual recall, Institutional roles and functions
-
Prelims 2025
Multi-statement analysis, Factual recall
-
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 GRANTS TO PANCHAYATI RAJ INSTITUTIONS
The Finance Commission, under Article 280, recommends grants to local bodies to strengthen their finances, but release is often conditional on states meeting eligibility criteria, highlighting challenges in fiscal devolution.
See also
Past papers
2014–2025 · 8 questions
In the news
FINANCE COMMISSION GRANTS TO PANCHAYATI RAJ INSTITUTIONS
The Finance Commission, under Article 280, recommends grants to local bodies to strengthen their finances, but release is often conditional on states meeting eligibility criteria, highlighting challenges in fiscal devolution.
Try these PYQs
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.
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:
Consider the following statements:
I. Panchayats at the intermediate level exist in all States.
II. To be eligible to be a Member of a Panchayat at the intermediate level, a person should attain the age of thirty years.
III. The Chief Minister of a State constitutes a commission to review the financial position of Panchayats at the intermediate levels and to make recommendations regarding the distribution of net proceeds of taxes and duties, leviable by the State, between the State and Panchayats at the intermediate level.
Which of the statements given above are not correct?
❌ Statement I: Incorrect
*Intermediate-level Panchayats are not mandatory in all states; states with population under 20 lakhs may skip this tier.* ❌ Statement II: Incorrect
*Minimum age to be a Panchayat member is 21 years, not 30.* ❌ Statement III: Incorrect
*State Finance Commission is constituted by the Governor, not the Chief Minister.* Correct Answer: All three statements are incorrect.
With reference to the "Tea Board" in India, consider the following statements:
1. The Tea Board is a statutory body.
2. It is a regulatory body attached to the Ministry of Agriculture and Farmers Welfare.
3. The Tea Board's Head Office is situated in Bengaluru.
4. The Board has overseas offices at Dubai and Moscow.
Which of the statements given above are correct?
Statement 1 is correct: The Tea Board of India is a statutory body created under the Tea Act, 1953 and it was established to regulate the Indian tea industry and protect the interests of tea producers in India. Statement 2 is incorrect: It is functioning as a statutory body of the Central Government under the Ministry of Commerce. Statement 3 is incorrect: The Tea Board of India's Head Office is situated in Kolkata. Statement 4 is correct: The Tea Board of India has overseas offices in Moscow, Dubai, Hamburg, London, and New York.
Show 3 more PYQs
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.
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.
With reference to Finance Bill and Money Bill in the Indian Parliament consider the following statements:
1. When the Lok Sabha transmits Finance Bill to the Rajya Sabha, it can amend or reject the Bill.
2. When the Lok Sabha transmits Money Bill to the Rajya Sabha, it cannot amend or reject the Bill, it can only make recommendations.
3. In the case of disagreement between the Lok Sabha and the Rajya Sabha, there is no joint sitting for Money Bill, but a joint sitting becomes necessary for Finance Bill.
How many of the above statements are correct?
Statement 1 is correct: While a Finance Bill (Category I under Art 117) is introduced only in the Lok Sabha (similar to a Money Bill), it is passed according to the ordinary legislative procedure. Therefore, the Rajya Sabha has the power to reject or amend it. Statement 2 is correct: A Money Bill (Article 110) cannot be rejected or amended by the Rajya Sabha. It can only make recommendations which the Lok Sabha may accept or reject. Statement 3 is incorrect: While a Joint Sitting is not provided for Money Bills, it is available for Finance Bills. However, it is not "necessary" (mandatory) to hold one. Under Article 108, the President "may" summon a Joint Sitting to resolve the deadlock, but is not obliged to do so; the bill could simply be allowed to lapse.