The correct answer is option 2: Constitutional institution. A constitutional institution is one that is established by the constitution of a country, and its functioning and powers are defined by the constitution itself. The Finance Commission in India is a constitutional institution as it is mentioned in Article 280 of the Indian Constitution. It is tasked with the responsibility of making recommendations to the President of India regarding the distribution of financial resources between the central government and the state governments. The Finance Commission plays a crucial role in ensuring fiscal federalism and equitable distribution of funds for the welfare and development of the states.