INR 3.56 lakh crore — Total urban allocation, 2026–31
230% — Increase from the XV Finance Commission
45% — Urban share of total local government grants (highest ever)
52% — Share of grants that are untied, giving cities discretion over spending

All of the grants are broadly divided into:
Basic Grants — ₹2,32,125 crore
The foundation of the package. These go to all Urban Local Governments across India. 50% of the basic component is tied to sanitation and water management; the remaining 50% is untied, giving cities discretion to spend on locally identified needs. No ULG may use untied funds for salary or establishment costs, and road spending is capped at 20% of the untied allocation.

Performance Grants — ₹58,032 crore
Split equally between a ULG performance component linked to 5% improvements in own-source revenue and a State performance component linked to state transfer at least 20% of the basic grant equivalent to cities from their own revenues. The ULG performance component begins in the second year of the award period.

Special Infrastructure Component — ₹56,100 crore
Targeted at selected cities with populations between 10 lakh and 40 lakh (as per Census 2011), limited to two cities per state. The entire allocation is tied to comprehensive wastewater management — drainage systems, sewerage networks, and flood resilience.

Urbanisation Premium — ₹10,000 crore
Targeted at peri-urban areas transitioning into formal Urban Local Governments. This one-time grant, at ₹2,000 per person (based on Census 2011 population), flows to areas that merge into adjoining ULGs of at least 1 lakh population. States must also formulate a Rural-to-Urban Transition Policy to claim this component, directly addressing the governance vacuum that has afflicted India’s rapidly urbanising peripheries.

 
Urban India already has a substantial share of the population — and an even larger share of economic activity. These cities are governed by more than 4,800 Urban Local Governments (ULGs) of varying sizes and capacities. But the fiscal foundations on which these cities operate remain fragile. 

Even without comprehensive bottom-up estimates of urban infrastructure and service delivery needs, available evidence clearly shows that cities’ investment needs far exceed the funds currently at their disposal. Municipal revenues are insufficient to meet both existing service backlogs and the demands of rapid urbanization.

According to the World Bank (2022), Indian cities require USD 840 billion in capital investment over the 15-year period leading up to 2036, equivalent to USD 108 per capita per year. In contrast, between 2011 and 2018, urban capital spending averaged only USD 10.6 billion annually, or about USD 26 per capita per year — nearly four times lower than what is required. All municipal revenues combined amount to less than 0.77% of GDP, far below the HPEC benchmark of 1.71%. 

In contrast, between 2011 and 2018, urban capital spending averaged only USD 10.6 billion annually, or about USD 26 per capita per year — nearly four times lower than what is required. All municipal revenues combined amount to less than 0.77% of GDP, far below the HPEC benchmark of 1.71%. 

The roots of this imbalance run deep. The 74th Constitutional Amendment (1992) assigned a wide range of functions to Urban Local Governments — from street light to urban planning. But it did not transfer equivalent revenue powers. Under Article 243X, state governments retain control over the design, rates, exemptions, and administration of municipal taxes. Cities cannot independently strengthen their own revenue base.

State Finance Commissions (SFCs), established under Article 243Y to bridge this gap, have often been delayed, inconsistently implemented, or only partially accepted by states. Nearly one-third of city revenues come from grants rather than from locally collected taxes or fees. 

Established under Article 280 of the Constitution, the Union Finance Commission is the only institution constitutionally mandated to periodically assess and recommend how public funds are shared across levels of government. It addresses both the vertical gap between the Union and states, and the horizontal gap between states with different fiscal capacities. Since the 73rd and 74th Constitutional Amendments, the Finance Commission’s terms of reference have also explicitly covered local governments. This makes each Finance Commission a five-yearly opportunity to reset the terms of urban finance at a national scale.

Most Union Government urban schemes are sector-specific, geographically limited, and tightly tied to national priorities. Finance Commission grants are structurally different: they reach every Urban Local Government in India, in every state, every year. They are the most predictable and universal source of urban funding that cities receive. For smaller towns which receive little attention from centrally sponsored schemes Finance Commission grants are often the only significant source of capital funding.  

Unlike most Union urban schemes — which are sector-specific, tightly tied, and limited in geographic reach — Finance Commission transfers reach all ULGs across India, making them central to the functioning of India’s urban system. 

The last three decades have shown a profound shift in both scale and intent. The X Finance Commission (1995–2000) made the first-ever allocation to cities — ₹1,000 crore. This was a small, largely ad hoc transfer, routed through states, with no defined share of the divisible pool.   

By the XIII Finance Commission (2010–15), urban grants had reached ₹23,111 crore, accounting for 0.51% of the divisible pool. For the first time, 35% of urban grants were performance-linked, tying fund release to improvements in municipal accounting, budgeting, and fiscal discipline.  

The XIV Finance Commission (2015–20) significantly expanded urban devolution. Allocations rose to ₹87,144 crore, nearly four times the previous one. Performance grants were retained at 20% of urban allocations, with conditions streamlined around these reforms — 

• Publication of audited accounts 
• Increases in own-source revenues  
• Disclosure of service-level benchmarks 

The most consequential leap came with the XV Finance Commission (2021–26). Urban grants increased to ₹1.55 lakh crore, equivalent to 1.5% of the divisible pool and accounting for 36% of total local government grants — the highest urban share in Finance Commission history. 

The XV FC also introduced a differentiated grant architecture, recognising that Million-Plus Cities and smaller ULGs face fundamentally different fiscal capacities and development challenges. Accountability was strengthened through mandatory eligibility conditions for all urban grants, including the publication of audited annual accounts, improvements in property tax systems, and the constitution and functioning of State Finance Commissions. 

 The impact was unprecedented:  

• Over 96% of ULGs published audited accounts  
• 11 states constituted SFCs following these reforms 

This period also saw the institutionalization of digital public infrastructure for urban finance, including digital grant administration through CityFinance.

The XVI Finance Commission has ushered in a revolution in funding for Urban Local Governments (ULGs) in India. Its historic allocation of INR 3.56 lakh crore (c. USD 39 bn) over five years matches the spending of centrally sponsored schemes over the last thirteen years — combined.

At 45% of total local government grants, this represents the highest urban share in Finance Commission history and is a clear recognition of India’s urban future. 

Key highlights include:

230% increase in allocation to Urban Local Governments (ULGs)

Share of Local Government (LG) grants to ULGs increased to INR 3,56,357 crore under XVI FC, reflecting growing recognition of rapid urbanisation and its contribution to the economy. Four types of grants introduced: basic (INR 2,32,125 crore), performance (INR 58,032 crore), special infrastructure (INR 56,100 crore), and urbanisation premium (INR 10,000 crore). 

Substantial increase in untied component of ULG grants, empowering ULGs with greater autonomy — 52% of XVI FC grants (INR 1.84 lakh crore) which is 5.5x of INR 33,143 crore under XV FC). These funds can be spent on locally identified needs.  

Urbanisation Premium of INR 10,000 crore introduced, contingent on formulation of rural-urban transition policies — supporting rapidly urbanising areas where inadequate infrastructure and weak institutions create acute service delivery pressures.

Special Infrastructure Component of INR 56,100 crore to provide significant boost for development of comprehensive wastewater management systems in 22 cities with populations between 1-4 million. 

Push to expand the overall pool of funds for ULGs by factoring Own-Source Revenue (OSR) performance into allocation formulas, linking performance grants to OSR growth, and ensuring state transfers to ULGs of at least 20% of the FC basic grant equivalent. Performance grant linked to own source revenue may lead to a INR 40-45 thousand crore increase in OSR in five years.

Sustained focus on reforms to improve fiscal accountability and governance — retaining eligibility conditions for ULG elections, publication of audited accounts on www.cityfinance.in, timely constitution of State Finance Commissions, and mandatory tabling of Action Taken Reports within six months. 

At the heart of urban finance lies a simple goal: better services, stronger institutions, and more liveable cities for India’s citizens. The Finance Commission plays a defining role in enabling this transformation. Janaagraha remains committed to working with the Finance Commission to build stronger, more transparent, and more sustainable city finances and an empowered system of city governance. 

Strong city finances are fundamental to effective urban governance. Janaagraha works with the Union Finance Commission because it plays a central role in how India’s cities are financed. Finance Commissions help bridge the funding gap faced by Urban Local Governments and provide some of the largest and most predictable sources of funding for cities. 

Janaagraha’s engagement began with the XIII Finance Commission, contributing recommendations on municipal accounting and audit systems. This continued with the XIV Finance Commission, including presentations on municipal finance challenges and collaboration with national audit institutions to shape reforms on audited municipal accounts. 

We formally engaged with the XV Finance Commission and continued with the XVI Finance Commission through Memoranda of Understanding, supporting the Commission’s work through research and analytical studies on municipal finance and urban governance.

We formally engaged with the XV Finance Commission and continued with the XVI Finance Commission through Memoranda of Understanding, supporting the Commission’s work through research and analytical studies on municipal finance and urban governance. As part of this engagement, Janaagraha has participated in multiple full-Commission meetings with the XVI Finance Commission.

This engagement builds on two decades of Janaagraha’s collaboration with successive Finance Commissions. Its partnership with the XV Finance Commission resulted in the institutionalisation of CityFinance.in, which now hosts financial data from over 95% of India’s 4,300+ ULGs and administers INR 1.08 lakh crore in grants.  

At the heart of urban finance lies a simple goal: better services, stronger institutions, and more liveable cities for India’s citizens. The Finance Commission plays a defining role in enabling this transformation. Janaagraha remains committed to working with the Finance Commission to build stronger, more transparent, and more sustainable city finances and an empowered system of city governance. 

Demystifying Finance Commission for Urban India || Janaagraha

About City Finance

Loading

Understanding the XVI FC’s Urban Grants: Implications, Reforms, and Implementation Pathways

L

o

a

d

i

n

g

About City Finance