The system of governance in the Panchayati Raj setup is a three-tier structure of local self-government at the village, block, and district levels. Therefore, the correct option is Option 3.

Panchayati Raj is a system of local governance in India that aims to decentralize power and promote democratic decision-making at the grassroots level. It was established to ensure effective participation of local communities in the governance process and to address their specific needs and aspirations.

At the village level, the Gram Panchayat serves as the basic unit of Panchayati Raj. The Gram Panchayat consists of elected representatives from the village, known as Panchayat members. They are responsible for managing and implementing various local development activities, such as sanitation, healthcare, education, infrastructure, and agriculture. The Gram Panchayat plays a vital role in addressing the immediate needs of the village community and fostering local development.

The next level in the Panchayati Raj setup is the block level. The block is a cluster of several villages, and it is governed by the Panchayat Samiti or Block Panchayat. The Panchayat Samiti comprises elected representatives from different Gram Panchayats within the block. It acts as an intermediate level of governance, coordinating and overseeing the development activities of multiple villages. The Panchayat Samiti is responsible for planning and implementing programs, schemes, and services that benefit the entire block.

The highest level of the Panchayati Raj system is the district level. The Zilla Parishad or District Panchayat represents the district as a whole. It consists of elected representatives from the Panchayat Samitis within the district. The Zilla Parishad plays a crucial role in coordinating and supervising the activities of the Panchayat Samitis. It also works closely with various government departments to ensure the effective implementation of development programs and schemes at the district level.

It is important to note that while Panchayati Raj is a three-tier system, there is no provision for a separate tier at the state level. The state government, however, provides support and guidance to the Panchayati Raj institutions and is responsible for enacting laws and policies that enable effective functioning of the system.

Overall, the three-tier structure of Panchayati Raj ensures that decision-making powers are decentralized, allowing local communities to actively participate in their own development and decision-making processes. It promotes grassroots democracy, local accountability, and empowers communities to address their specific needs and challenges effectively.