Union Budget 2026: Centre aims at retaining states’ tax share at 41% for 2026–31

The Union Budget 2026-27 has proposed to retain states’ share in the divisible pool of central taxes at 41% for the 2026–31 period, in line with the recommendations of the constitutionally mandated Finance Commission, Finance Minister Nirmala Sitharaman said on Sunday.Presenting the Budget in Parliament, Sitharaman said the Centre has provided Rs 1.40 lakh crores as Finance Commission grants to states for FY27.

India’s Finance Commission had fixed the states’ share at 41% for the 2021–26 period, a reduction from 42% in the preceding five years to reflect the reorganisation of Jammu and Kashmir into two Union Territories.
The commission, chaired by economist Arvind Panagariya, submitted its report to the President in November last year after consultations with all 28 states and Union Territories. Several states had pressed for a higher share of central taxes.

The divisible pool comprises major central taxes mandated by the Constitution to be shared with states, including income tax, corporate tax, customs and excise duties, and goods and services tax (GST). It excludes cesses and surcharges, which are retained entirely by the Centre.

As many as 22 states had sought an increase in the share to 50%, citing rising expenditure needs on health, education and infrastructure. However, the Centre has remained cautious about widening vertical tax devolution, which determines how central tax revenues are transferred to states.
While the headline share for states has stayed elevated, the effective share of overall tax collections has declined over time, as a growing portion of central revenues is raised through cesses and surcharges that are outside the divisible pool.