Union budget 2026: Karnataka’s tax devolution falls short of expectations

Karnataka gets ₹63,049.58 crore in 2026‑27 tax devolution, below peers, despite being a top contributor; fiscal strain and fairness concerns grow

The Union Budget 2026‑27 has allocated Rs 63,049.58 crore to Karnataka as its share of taxes and duties, following the recommendations of the 16th Finance Commission. The Commission has fixed Karnataka’s tax share at 4.13 per cent, a figure that remains lower than what the State has been demanding.

Karnataka, India’s second‑highest tax‑paying State, has consistently argued for a revision of the horizontal devolution formula. The State has sought to restore its share to at least 4.71 per cent, the level granted by the 14th Finance Commission, or higher. Officials estimate that the reduction in share since the 15th Finance Commission has cost Karnataka nearly Rs 80,000 crore. The State contends that the current formula penalises high‑performing regions and relies too heavily on income distance, without adequately recognising tax contributions.

The financial impact has been significant. Under the 14th Finance Commission, Karnataka received Rs 4.71 out of every Rs 100 distributed to States. The 15th Finance Commission reduced this to Rs 3.64, resulting in a sharp decline in allocations. For 2025‑26, the Centre devolved Rs 51,876 crore to Karnataka, highlighting the gap between contributions and returns. Despite contributing between Rs 4.5 lakh crore and Rs 5 lakh crore annually to the Centre through taxes and cesses, Karnataka remains one of the lowest recipients relative to its overall budget size.

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In comparison, Andhra Pradesh will receive Rs 64,362.16 crore in 2026‑27, the highest among southern States. Tamil Nadu is set to get Rs 62,530.65 crore, Kerala Rs 36,355.39 crore, and Telangana Rs 33,180.78 crore.

The 16th Finance Commission, chaired by former NITI Aayog Vice‑Chairman Arvind Panagariya, has recommended retaining the overall States’ share in Central taxes at 41 per cent for the five‑year period beginning April 2026. The Union government has accepted this recommendation.

Additionally, the Centre has earmarked Rs 1.4 lakh crore as Finance Commission Grants for 2026‑27. These grants include allocations for rural and urban local bodies as well as disaster management. However, cesses and surcharges levied by the Centre remain outside the divisible pool, limiting the funds available for distribution.

For Karnataka, the challenge remains clear: despite being a major contributor to national revenues, its share of devolved taxes continues to lag behind expectations.

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