14th and 15th Finance Commission: Key Recommendations - UPSC Notes

The 14th and 15th Finance Commission are very important bodies in India's financial system. They are set up every five years to suggest how the money collected by the central government should be shared with the states. The change from the 14th to the 15th Finance Commission shows new ways of managing and sharing these funds, based on changes in the economy and population. What these commissions say affects how both the central and state governments plan their finances.

This topic is covered in the General Studies Paper III of the UPSC Civil Services Examination. This paper deals with the Indian economy, planning, and how resources are used for growth and employment. Understanding these finance commissions helps in understanding how money is distributed in the country, which is important for preparing for the UPSC exam.

Why in News?

As of April 2025, the recommendations of the 15th Finance Commission are in the implementation phase, with ongoing releases of grants to states and local bodies.

• 15th Finance Commission Grant Releases: As recently as February 18, 2025, the Ministry of Panchayati Raj updated information regarding the allocation and release of funds under the 15th Finance Commission for the period 2021-2026. 
• SASCI Scheme: The Scheme for Special Assistance to States for Capital Investment (SASCI), linked to Finance Commission recommendations, continues to be relevant. In December 2024, an additional ₹30,000 crore was allocated under SASCI-2024-25 as 'Untied Funds' for states to increase capital asset creation.

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Here is a simple table to understand the differences between the 14th and 15th Finance Commission:

Read the article on the 16th Finance Commission!

The 14th Finance Commission was established on 2 January 2013, with Dr. Y.V. Reddy as its chairman. It was given the five-year term from April 1, 2015, to March 31, 2020. The task of the commission was to suggest how to divide financial resources between the union government and state governments for India's development and equity.

Recommendations of the 14th Finance Commission

Some of the key recommendations of the 14th Finance commission include the following:

• Recommended that the states' share of the Union tax revenues be increased from 32% to 42%. This was the largest increase ever recommended, aiming to give states more financial independence.

• Used criteria such as Income Distance (50%), Population (1971 census) (17.5%), Area (15%), Forest Cover (7.5%), and Fiscal Discipline (10%) for distributing funds among states.
• Recommended allocating over ₹2.87 lakh crore to local bodies to improve services at the local level.
• Proposed setting aside ₹61,219 crore for the Disaster Management Fund to handle natural disasters and improve disaster response.
• Suggested providing grants to states facing a revenue shortfall after devolution to ensure fiscal stability.

Read the article on the Fiscal Policy in India!

About the 15th Finance Commission

The 15th Finance Commission was established on November 27, 2017, and its chairperson was N.K. Singh. It was to recommend how to disburse financial resources between the Centre and states from April 1, 2020, to March 31, 2025. It considered the latest economic parameters and new issues encountered in India's financial system.

Recommendations of the 15th Finance Commission

Some of the most important suggestions of the 15th Finance commission are as follows:

• Recommended to allocate 41% of the net Union tax revenues to the states. This is a marginal cut from the 42% recommended by the earlier commission. This is done to make provision for the newly constituted Union Territories of Jammu & Kashmir and Ladakh.

• Updated criteria weights, including Income Distance (45%), Population (2011 census) (15%), Area (15%), Forest and Ecology (10%), Demographic Performance (12.5%), and Tax Effort (2.5%) to better reflect current socio-economic conditions.
• Allocated specific health grants totaling over ₹1.5 lakh crore to improve the health sector. This is in response to the COVID-19 pandemic and the need to strengthen healthcare infrastructure.
• Introduced performance-based incentives for states on demographic performance, agricultural reforms, disinvestment, environmental sustainability, power sector reforms, and solid waste management, aligning state priorities with national goals.
• Provided funds to states facing revenue deficits after the distribution of taxes to maintain fiscal balance.
• Recommended ₹4.36 lakh crore for local bodies and ₹1.60 lakh crore for disaster management. These aim to enhance local governance and disaster preparedness.

Read the article on Federalism in India!

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