All states in India must have exactly the same three-tier panchayat structure with no exceptions.

Clause (2) specifically allows small states (population under 20 lakh) to skip the intermediate level, so the structure can have two tiers instead of three in such states.

Panchayats are optional local bodies that states can choose not to create.

Clause (1) uses the mandatory phrase 'There shall be constituted,' meaning states are constitutionally required to set up panchayats, not merely permitted to.

The Constitution of India

Article 243B

Constitution of Panchayats

(1) There shall be constituted in every State, Panchayats at the village, intermediate and district levels in accordance with the provisions of this Part.§

(2) Notwithstanding anything in clause (1), Panchayats at the intermediate level may not be constituted in a State having a population not exceeding twenty lakhs.§

Why this exists

This Article was added by the 73rd Constitutional Amendment in 1992, which gave panchayats constitutional status for the first time. Before this, panchayats existed in various forms across states but had no guaranteed structure, powers, or protection, and many state governments ignored or dissolved them. The framers wanted a uniform three-tier system of rural local government to strengthen grassroots democracy, but they also recognized that very small states (in terms of population) might not need a middle administrative tier, so they allowed a practical exception.

Common misconceptions

Myth: All states in India must have exactly the same three-tier panchayat structure with no exceptions.
Fact: Clause (2) specifically allows small states (population under 20 lakh) to skip the intermediate level, so the structure can have two tiers instead of three in such states.
Myth: Panchayats are optional local bodies that states can choose not to create.
Fact: Clause (1) uses the mandatory phrase 'There shall be constituted,' meaning states are constitutionally required to set up panchayats, not merely permitted to.