Centre releases additional instalment of tax devolution of ₹1.09 lakh crore to States
The Union Government released an additional instalment of tax devolution amounting to ₹1,09,019 crore (about ₹1.09 lakh crore) to States on 1 August 2026, ahead of the regular monthly instalment due around 10 August
The release was described as being in line with the government's commitment to strengthen State finances and accelerate capital and developmental expenditure
All States received a share, with larger, more populous States receiving proportionally larger amounts — Uttar Pradesh (₹19,208 crore), Bihar (₹10,845 crore), Madhya Pradesh (₹8,010 crore), West Bengal (₹7,866 crore), and Maharashtra (₹7,022 crore) among the top recipients, while smaller States such as Sikkim, Goa, and Nagaland received the smallest shares
Tax devolution to States is currently routed in 14 instalments through a fiscal year, with this release being an additional, advance instalment over and above that regular schedule
Constitutional Basis of Tax Devolution
Tax devolution — the sharing of net proceeds of Union taxes with the States — flows from Article 270 of the Constitution, while Article 280 provides for the constitution of a Finance Commission every five years to recommend how this divisible pool should be shared. This distinguishes devolution from Article 275 grants-in-aid, which are discretionary, need-based, and tied to specific purposes (such as revenue-deficit support or welfare of Scheduled Tribes), unlike the formulaic, unconditional devolution under Article 270.
Key Details
- The 16th Finance Commission, chaired by Dr. Arvind Panagariya (former Vice-Chairman, NITI Aayog), was constituted on 31 December 2023 to recommend devolution and related fiscal transfers for the five-year period 2026-27 to 2030-31
- The 15th Finance Commission (chaired by N.K. Singh) recommended a vertical devolution share of 41% of the divisible pool to States for 2021-26, a figure that had itself continued from an interim rate the Commission set for 2020-21
- Article 271 allows Parliament to levy surcharges for its own purposes, excluded from the divisible pool shared with States
The August 2026 additional instalment is released under the vertical-devolution share currently recommended by the applicable Finance Commission, distributed among States per the horizontal devolution formula, rather than as a discretionary Article 275 grant.
Why the Devolution Share Fell from 42% to 41%
The 14th Finance Commission (chaired by Y.V. Reddy) had recommended a record vertical devolution share of 42% of the divisible pool for States for 2015-20 — the largest increase in the states' share up to that point. The 15th Finance Commission reduced this by one percentage point to 41% for 2021-26, explicitly to account for the reorganisation of the erstwhile State of Jammu and Kashmir into two Union Territories — Jammu & Kashmir (with legislature) and Ladakh (without legislature) — effective 31 October 2019 under the Jammu and Kashmir Reorganisation Act, 2019, since Union Territories do not receive a share through the States' devolution formula.
Key Details
- The erstwhile State of Jammu and Kashmir accounted for approximately 0.85% of the divisible pool, which the 15th Finance Commission rounded up to a 1 percentage point adjustment
- The horizontal devolution formula used by the 15th Finance Commission for 2021-26 weighted criteria as: Income Distance 45%, Population (2011 Census) 15%, Area 15%, Demographic Performance 12.5%, Forest and Ecology 10%, and Tax and Fiscal Effort 2.5%
- Demographic Performance rewards States for population-control efforts by comparing 1971 and 2011 Census data, protecting States that reduced fertility rates from being penalised for having a smaller 2011 population base
The State-wise distribution of the August 2026 additional instalment — larger populous States like Uttar Pradesh and Bihar receiving the biggest absolute shares — reflects the interplay of the Population and Income Distance criteria within this horizontal formula.
The Divisible Pool: What is Excluded
The divisible pool consists of the net proceeds of Union taxes referred to in Article 270, but it explicitly excludes cesses and surcharges levied by the Union, which are retained entirely by the Centre and are not shared with States under the Finance Commission's devolution formula. This is distinct from mechanisms like the GST Compensation Cess, which was a separate, earmarked levy under the GST (Compensation to States) Act, 2017, used to compensate States for revenue shortfalls after GST rollout rather than to fund general devolution.
Key Details
- Because cesses and surcharges sit outside the divisible pool, States' effective share of gross Union tax revenue is consistently lower than the nominal 41% devolution rate applied only to the divisible pool
- The GST Compensation Cess was levied on select goods (tobacco, coal, aerated drinks, high-end automobiles) and routed into a dedicated GST Compensation Fund, guaranteeing States a 14% annual revenue growth rate for five years after GST's 2017 rollout — a fundamentally different, time-bound mechanism from the constitutionally mandated, formula-based devolution under Article 270
The ₹1.09 lakh crore released in August 2026 is a devolution instalment under Article 270/280, not a GST compensation payment — a distinction States and the Centre routinely debate in the context of "vertical fiscal imbalance," where States argue growing reliance on cesses and surcharges shrinks their effective share of Union tax revenue.
- Additional tax devolution instalment released: ₹1,09,019 crore (~₹1.09 lakh crore), on 1 August 2026
- Top recipient States: Uttar Pradesh (₹19,208 crore), Bihar (₹10,845 crore), Madhya Pradesh (₹8,010 crore), West Bengal (₹7,866 crore), Maharashtra (₹7,022 crore)
- Regular devolution schedule: 14 instalments per fiscal year (this release was an additional, advance instalment)
- Constitutional basis: Article 270 (tax devolution) and Article 280 (Finance Commission)
- Current vertical devolution rate: 41% of the divisible pool (15th Finance Commission recommendation for 2021-26, reduced by 1 percentage point from the 14th Finance Commission's 42%)
- 16th Finance Commission: constituted 31 December 2023, chaired by Dr. Arvind Panagariya, covering the award period 2026-27 to 2030-31