It has recommended a total grant of ~₹7.9 Lakh crore to India’s rural and urban local bodies for the next five years (FY 2026-27 to 2030-31) with other important recommendations.

Challenges in Local Body Financing

• Structural Revenue Gaps: E.g., Property tax collections are low due to incomplete and inaccurate property records, low coverage, undervaluation of properties etc.
• Overdependence on Union/State Govt.: E.g., Panchayats’ reliance on Grants (over 90% of their revenues)
• Limited Access to Debt and Capital Markets: Municipal borrowings in India are estimated at less than 0.05% of GDP.
• Other: Underdeveloped Bond Market; Data Gaps and Accounting Issues; Delays in Constitution of State Finance Commissions (SFCs) etc.

Recommendations by 16th Finance Commission

• Property database: States should develop a citizen friendly GIS based property tax IT system.
• Rural-Urban Split: The aggregate grant to be divided in a 60:40 ratio between RLBs and ULBs.
• Urbanisation Premium: An allocation of ₹10,000 crore is designated to incentivize merger of peri-urban villages into adjoining larger ULBs (with population > 1 lakh).
• Constitutional Amendment: Removing constitutional requirement (Articles 280(3) (bb) and (c)) that binds Central FC to make recommendations "on the basis of" SFC recommendations.
• Best Practices: NITI Aayog recommended to study SFC functioning and publish a compendium of good practices for States.