Article 295 applies to all Indian states, including former British India provinces.

It applies specifically to Part B States, which were former princely states; former British India provinces (Part A States) are covered separately under Article 294.

The Union automatically got all property of princely states.

The Union only got property and liabilities tied to Union List subjects; everything else passed to the new State Governments, and any prior agreement between the Union and the State could override the default rule.

The Constitution of India

Article 295

Succession to property, assets, rights, liabilities and obligations in other cases

(1) As from the commencement of this Constitution —§

(a) all property and assets which immediately before such commencement were vested in any Indian State corresponding to a State specified in Part B of the First Schedule shall vest in the Union, if the purposes for which such property and assets were held immediately before such commencement will thereafter be purposes of the Union relating to any of the matters enumerated in the Union List, and§

(b) all rights, liabilities and obligations of the Government of any Indian State corresponding to a State specified in Part B of the First Schedule, whether arising out of any contract or otherwise, shall be the rights, liabilities and obligations of the Government of India, if the purposes for which such rights were acquired or liabilities or obligations were incurred before such commencement will thereafter be purposes of the Government of India relating to any of the matters enumerated in the Union List,§

subject to any agreement entered into in that behalf by the Government of India with the Government of that State.§

(2) Subject as aforesaid, the Government of each State specified in Part B of the First Schedule shall, as from the commencement of this Constitution, be the successor of the Government of the corresponding Indian State as regards all property and assets and all rights, liabilities and obligations, whether arising out of any contract or otherwise, other than those referred to in clause (1).§

Why this exists

After independence, hundreds of princely states acceded to or merged with India and were reorganized into 'Part B States' under the First Schedule. Someone had to legally inherit their treasuries, properties, contracts, and debts. Article 295 (along with Article 294 for former British India provinces) was the constitutional 'estate settlement' clause: it divided the old princely states' assets and liabilities between the new Union and State Governments based on which level of government would now handle the relevant subject matter, while respecting any specific merger agreements or covenants already signed.

Common misconceptions

Myth: Article 295 applies to all Indian states, including former British India provinces.
Fact: It applies specifically to Part B States, which were former princely states; former British India provinces (Part A States) are covered separately under Article 294.
Myth: The Union automatically got all property of princely states.
Fact: The Union only got property and liabilities tied to Union List subjects; everything else passed to the new State Governments, and any prior agreement between the Union and the State could override the default rule.