Cashless India: ₹1,500 Crore Incentive Plan to Boost Small-Value BHIM-UPI Transactions

The Union Cabinet has approved a ₹1,500 crore incentive scheme for the financial year 2024-25 to encourage small-value BHIM-UPI transactions. The initiative aims to strengthen India’s digital payment infrastructure by ensuring zero Merchant Discount Rate (MDR) on UPI transactions while offering a 0.15% incentive on transactions up to ₹2,000 made to small merchants.

Expanding UPI Infrastructure in Rural Areas

A key focus of the scheme is to expand UPI services in rural and semi-urban areas. The initiative integrates tools like UPI 123PAY, UPI Lite, and LiteX, ensuring widespread adoption across different demographics. According to the ACI Worldwide Report 2024, India accounted for 49% of all global real-time transactions in 2023, highlighting its leadership in digital payments.

Approval of Incentive Scheme

Chaired by Prime Minister Narendra Modi, the Union Cabinet approved the Incentive Scheme for Promotion of Low-Value BHIM-UPI Transactions (Person to Merchant – P2M) for FY 2024-25. This initiative aligns with the government’s broader vision of boosting digital transactions, encouraging small merchants to adopt UPI, and promoting financial inclusion.

Understanding the Merchant Discount Rate (MDR)

Digital payments have become essential to India’s financial inclusion strategy, providing citizens with secure and accessible payment options. Typically, businesses pay an MDR fee to payment processors for digital transactions. The Reserve Bank of India (RBI) has set MDR at up to 0.90% for debit card networks, while the National Payments Corporation of India (NPCI) has capped MDR at 0.30% for UPI P2M transactions.

Since January 2020, the government has set zero MDR for RuPay Debit Card and BHIM-UPI transactions, amending the Payments and Settlement Systems Act, 2007, and the Income-tax Act, 1961 to facilitate digital payment adoption.

Distribution of Incentive Amount

To support seamless digital payment services, the government has implemented the Incentive Scheme for the Promotion of RuPay Debit Cards and Low-Value BHIM-UPI Transactions (P2M). The approved funds will be distributed among acquiring banks, issuer banks, payment service provider banks, and app providers to sustain a smooth payment ecosystem.

Scheme Implementation and Coverage

The incentive scheme will be implemented from April 1, 2024, to March 31, 2025, with an estimated outlay of ₹1,500 crore. It will cover only UPI transactions up to ₹2,000, targeting small merchants to foster digital payment adoption at the grassroots level.

Growth of UPI Transactions

UPI transactions have witnessed exponential growth, increasing from ₹21.3 lakh crore in FY 2019-20 to ₹213.8 lakh crore as of January 2025. Person-to-Merchant (P2M) transactions have also surged, reaching ₹59.3 lakh crore, reflecting a steady rise in digital payment adoption across India.

Strengthening Digital Payment Infrastructure

The scheme aims to promote the BHIM-UPI platform, targeting a transaction volume of ₹20,000 crore in FY 2024-25. It focuses on improving the payment infrastructure by ensuring high uptime, reducing technical failures, and expanding UPI services to remote areas, including tier 3 to tier 6 cities. Additionally, tools like UPI 123PAY (for feature phones), UPI Lite, and LiteX (for offline payments) will play a crucial role in accessibility.

Merchant Incentive Structure

Incentives will be structured based on merchant categories and transaction values:

• Small merchants processing UPI transactions up to ₹2,000 will receive a 0.15% incentive on transaction amounts while maintaining zero MDR.

• Transactions above ₹2,000 will remain exempt from MDR but will not qualify for incentives.

• Large merchants will have zero MDR but will not be eligible for incentives, regardless of transaction value.

Reimbursement Mechanism

The reimbursement mechanism for acquiring banks includes:

• 80% of the admitted claim amount will be disbursed unconditionally each quarter.

• 10% of the remaining 20% will be contingent on an acquiring bank maintaining a technical decline rate below 0.75%.

• The other 10% will depend on system uptime exceeding 99.5%.

Advantages for Merchants

For merchants, the scheme brings several benefits, including:

• Convenience and Speed: Encourages faster transactions with digital payments.

• Access to Digital Credit: Facilitates access to financial services.

• Zero Additional Costs: No extra charges for UPI transactions.

• Increased Adoption: Encourages small businesses to embrace UPI payments, fostering a formalized, less-cash economy.

Ensuring Seamless Digital Transactions

With a focus on reliability, the initiative ensures high uptime and low failure rates, offering round-the-clock digital payment services. By promoting small-value UPI transactions and enhancing infrastructure, the government aims to drive digital payment penetration across India, strengthening financial inclusion and economic digitization.