States with larger fiscal capacity allocate more funds to healthcare, but the current transfer mechanism has not effectively addressed the disparities between more developed and lagging states. This study calculates the state-specific finance gap and total fiscal equalization transfers for healthcare to 29 Indian states, using Australia’s expenditure equalization procedure and static panel data model estimation techniques. Results indicate that states such as Uttar Pradesh, Bihar, Maharashtra, and West Bengal face substantial expenditure gaps. In 2021–22, the government spent just 1.2% of GDP on health, falling short of its goal to increase this to 2.5% of GDP by 2025. Providing additional equalization transfers could help bridge this gap and bring public spending closer to the target. These findings offer valuable insights for policymakers and researchers, aiding the development of effective strategies and designing appropriate equalization transfers for healthcare across Indian states.