The Centre is set to roll out model Own Source Revenue (OSR) guidelines for India’s 262,000 gram panchayats to strengthen their financial independence and reduce their reliance on grants from the Centre and states, according to two people familiar with the development.
The 16th Finance Commission (2026-27 to 2030-31) places renewed focus on enhancing OSR so that village councils become more financially self-reliant while improving public service delivery.
With 42% of India's gram panchayats collecting less than ₹1 lakh annually in OSR in FY22 and 21 states having framed their own OSR rules, the model framework prepared by the ministry of panchayati raj is intended to serve as a template for states to formulate or update rules governing the levy and collection of tax and non-tax revenue.
They include property tax, building and trade licence fees, user charges for water supply and sanitation, market fees, rental income from panchayat-owned assets and leasing of common property resources.
The average per capita OSR collected by panchayats at an all-India level was ₹100, while the average annual OSR for gram panchayats was ₹2.3 lakh. Some village-level self-governing local bodies in the western and southern states generated more than ₹10 crore annually.
Panchayats function as grassroots institutions that implement government schemes and promote Sustainable Development Goals.
"The absence of standardized systems—due to their governance under different state frameworks—has led to gaps in data collection, recording and sharing," one person said.
“The objective of framing these OSR rules is to enable states to modify/update/frame their own OSR rules based on the model given by the ministry, which, in turn, will go a long way in enhancing revenue generation and making panchayats self-reliant," the ministry of panchayati raj said in response to an email query.
Incentivizing panchayats
Performance-linked grants are offered to incentivize panchayats that demonstrate improvement in OSR mobilization.
“The ultimate goal is an aatmanirbhar panchayat that is not merely a recipient of state resources but a self-sustaining unit of local governance, setting an example for inclusive, accountable and financially sound administration at the village level," the second person said.
According to the Economic Survey 2025-26, despite receiving grants from the Central Finance Commission and state finance commissions, PRIs (panchayati raj institutions) are unable to meet their potential and public expectations due to insufficient resources. Greater financial independence through OSR enables PRIs to make more informed decisions on expenditure.
According to the Economic Survey, however, states and UTs including Arunachal Pradesh, Bihar, Jharkhand, Manipur, Nagaland, Sikkim, Uttar Pradesh, Andaman & Nicobar Islands, Dadra and Nagar Haveli & Daman and Diu, Ladakh and Lakshadweep do not have such provisions, underscoring the need for rules to enhance local governance across the country.
The 16th Finance Commission has recommended ₹4,35,236 crore for rural local bodies for the period from 2026-27 to 2030-31, representing an increase of almost 84% over the comparable five-year allocation under the 15th Finance Commission. This is the largest constitutional support recommended so far for panchayati raj Institutions and reflects the growing importance of local governments in India's development journey.
According to officials, the 16th Finance Commission goes beyond increasing financial transfers. It introduces a stronger emphasis on performance, accountability and financial sustainability. The commission reiterates that Finance Commission grants are intended to supplement, and not substitute, the responsibility of states to strengthen panchayats.