The Finance Commission normally takes about two years to make their recommendations. As per the clause (1) of article 280 of the Constitution, the Finance Commission is to be constituted every fifth year or earlier. However, as the recommendations of the 15th FC cover the six-year period up to 31st March 2026, the 16th FC is proposed to be constituted now. This will enable the Finance Commission to consider and appraise the finances of the Union and the States for the period immediately, preceding the period of its recommendations. In this context, it is pertinent to mention that there are precedents where the Eleventh Finance Commission was constituted six years after the Tenth Finance Commission. Similarly, the Fourteenth Finance Commission was constituted five years and two months after the Thirteenth Finance Commission.

The Advance Cell of the 16th FC was formed in Ministry of Finance on 21.11.2022, to oversee preliminary work, pending formal constitution of the Commission.

Terms of Reference for the Sixteenth Finance Commission:

The Finance Commission shall make recommendations as to the following matters, namely:

• The distribution between the Union and the States of the net proceeds of taxes which are to be, or may be, divided between them under Chapter I, Part XII of the Constitution and the allocation between the States of the respective shares of such proceeds;
• The principles which should govern the grants-in-aid of the revenues of the States out of the Consolidated Fund of India and the sums to be paid to the States by way of grants-in-aid of their revenues under article 275 of the Constitution for the purposes other than those specified in the provisos to clause (1) of that article; and
• The measures needed to augment the Consolidated Fund of a State to supplement the resources of the Panchayats and Municipalities in the State on the basis of the recommendations made by the Finance Commission of the State.