India’s constitutional framework of fiscal federalism seeks to balance national unity with decentralised governance by distributing financial powers among the Union, States, and local self-government institutions. The enactment of the Seventy-Third and Seventy-Fourth Constitutional Amendments marked a decisive shift by constitutionally recognising Panchayats and Municipalities as institutions of self-government and by introducing the Eleventh and Twelfth Schedules. Within this framework, the Central Finance Commission and the State Finance Commissions assume a pivotal role in translating constitutional functions into fiscal capacity. This paper critically examines the constitutional design, evolution, and operational interface of the Central Finance Commission and State Finance Commissions in relation to municipal functions enumerated under the Twelfth Schedule. It analyses whether existing devolution mechanisms have effectively addressed vertical and horizontal fiscal imbalances and enabled meaningful urban self-governance. The study highlights persistent structural challenges, including weak own-source revenues, delayed constitution of State Finance Commissions, selective implementation of recommendations, and increasing reliance on conditional transfers. Drawing upon constitutional provisions, judicial interpretation, and institutional practice, the paper argues that decentralisation without assured finance undermines the constitutional promise of local self-government. It concludes that strengthening State Finance Commissions, ensuring predictable and rule-based transfers, and aligning fiscal flows with functional responsibilities are essential to realise the constitutional vision of cooperative and finance-backed urban governance.