Cabinet approves Rs 1,500 Cr incentive to boost small UPI transactions

Government has approved a Rs 1,500 crore incentive scheme aimed at promoting low-value BHIM-UPI transactions among small merchants in the financial year 2024-25.

The incentive structure will provide a 0.15% reimbursement per transaction for payments up to Rs 2,000 made to small merchants. Larger merchants, however, will not be eligible for incentives under this scheme.

The government expects this initiative to help achieve a total UPI transaction volume target of Rs 20,000 crore for the fiscal year.

The scheme includes an 80% upfront reimbursement of admitted claims from acquiring banks, while the remaining 20% will be contingent on technical performance metrics, including system uptime above 99.5% and a technical decline rate below 0.75%.

The scheme, effective from April 1, 2024, to March 31, 2025, seeks to formalize India’s cash-dominated economy by easing costs for price-sensitive vendors and ensuring “zero MDR” (merchant discount rate) for consumers.

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This comes after Union Budget 2025 allocations for promoting RuPay debit cards and low-value BHIM-UPI transactions had been slashed from Rs 2,484.97 crore in FY 2023-24 to a projected Rs 437 crore in FY 2025-26, marking an 82% decline in funding over two years.

For FY 2024-25, the government initially allocated Rs 1,441 crore in incentives, later increasing it to Rs 2,000 crore in the revised estimates. UPI incentives played a crucial role in enabling low-value transactions and ensuring a level playing field, preventing large players from dominating the market—especially in the absence of the Merchant Discount Rate.

MDR is a fee that merchants pay to banks or payment service providers for processing digital transactions. The government eliminated MDR charges on UPI in 2019 to promote digital payments, making UPI incentives a vital revenue source for smaller players to sustain themselves.