UPSC Prelims 2025 Q66: 15th Finance Commission Recommendations
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.
- I, II and III
- I, II and IV
- I, III and IV
- II, III and IV
Answer: (c) I, III and IV
Statement-wise explanation
- I: correct — The 15th Finance Commission's 2021-26 report recommended performance grants of ₹4,800 crore from 2022-23 to 2025-26, or ₹1,200 crore a year, to reward States that improve educational outcomes. This sits within its sector-specific grant for school education. The State's education department must use the money and cannot divert it to another department.
- II: incorrect — The Commission recommended that States get 41% of the divisible pool of Union taxes for 2021-26, not 45%. This is 1 percentage point lower than the 14th Finance Commission's 42%. The cut covers the needs of the new Union Territories of Jammu & Kashmir and Ladakh, which no longer share in State devolution. The 45% in the statement is the weight of the 'income distance' criterion in the horizontal formula, not the size of the States' share.
- III: correct — The Commission set aside ₹45,000 crore as a performance-based incentive for all States that carry out agricultural reforms during the award period. It is one of the reform-linked grants that sit beside tax devolution.
- IV: correct — The 11th and 12th Finance Commissions had used tax effort as a criterion. The 13th and 14th Commissions dropped it. The 15th Commission brought it back as 'tax and fiscal efforts' with a 2.5% weight in the horizontal formula. It measures a State's average per capita own tax revenue against its average per capita GSDP for 2016-17 to 2018-19, so States that collect more from their own tax base are rewarded.
How to eliminate
One well-known fact settles this question: the 15th Finance Commission kept the States' share of the divisible pool at 41%. That makes Statement II wrong. Three of the four options contain II, so dropping them leaves only the option with I, III and IV. You do not need to know the ₹4,800 crore education grant or the ₹45,000 crore agriculture incentive. If you half-remember '45' from the formula, keep the two lists apart: 45% is the weight of income distance in how the money is split among States. 41% is how much goes to the States as a group. The Commission's vertical share is the one number to remember: 42% under the 14th FC, 41% under the 15th, and 41% again under the 16th.
Know more
How a Finance Commission divides Union taxes
Under Article 280, a Finance Commission is set up every five years. It recommends how the divisible pool is shared. The divisible pool is the Union's gross tax revenue minus cesses, surcharges and collection costs.
- Vertical devolution: the share of the pool that goes to all States together. It was 42% under the 14th FC (2015-20) and 41% under the 15th FC (2021-26).
- Horizontal devolution: how that share is split among individual States, using a weighted formula.
| Criterion | 14th FC | 15th FC (2021-26) |
|---|---|---|
| Income distance | 50% | 45% |
| Population | 17.5% (1971) + 10% (2011) | 15% (2011) |
| Area | 15% | 15% |
| Forest cover / Forest & ecology | 7.5% | 10% |
| Demographic performance | – | 12.5% |
| Tax & fiscal efforts | – | 2.5% |
The 15th FC used 2011 Census population. To avoid penalising States that had controlled population growth, it added demographic performance. Tax and fiscal efforts rewards States that collect more of their own taxes relative to the size of their economy.
Grants-in-aid (Article 275) come on top of devolution. For 2021-26, the 15th FC recommended about ₹10.33 lakh crore in grants:
- revenue deficit grants (about ₹2.9 lakh crore)
- local body grants (₹4.36 lakh crore)
- disaster management grants (₹1.22 lakh crore)
- sector-specific grants (about ₹1.3 lakh crore, with a part linked to performance)
Performance incentives included ₹4,800 crore for school education outcomes and ₹45,000 crore for agricultural reforms.
Exam trap: don't mix up the weight of a criterion, such as 45% for income distance, with the share of the divisible pool, which is 41%.
In the news
The 15th Finance Commission's award period ends in 2025-26. The 16th Finance Commission, constituted in December 2023, was preparing its report for 2026-31 when the 2025 Prelims was held. The outgoing Commission's devolution share, formula and incentive grants were therefore back in the news.
NCERT Concepts to Revise
- Vertical devolution: Statement II tests the size of the vertical devolution share recommended for 2021-26.
- Divisible pool: The States' share in Statement II is a percentage of the divisible pool, not of gross Union tax revenue.
- Grants-in-aid: Statements I and III describe performance-linked grants, which come in addition to the States' share of taxes.