Cabinet Approves ₹1,500 Crore UPI Incentive Scheme
The Union Cabinet, led by Prime Minister Narendra Modi, has greenlit a significant ₹1,500 crore incentive scheme aimed at promoting low-value BHIM-UPI transactions for the financial year 2024-25. This initiative is designed to encourage digital payments among small merchants, ensuring zero Merchant Discount Rate (MDR) on transactions up to ₹2,000. The scheme also seeks to enhance UPI infrastructure in rural and semi-urban areas, reinforcing India’s position as a global leader in digital payments.
Strengthening India’s Digital Payment Ecosystem
The government’s push for digital payments is a crucial element of its broader strategy for financial inclusion. By promoting the use of BHIM-UPI, the initiative aims to provide diverse payment options to the public, particularly benefiting small merchants who often face challenges in adopting digital solutions. The Merchant Discount Rate (MDR) is a fee that merchants incur when processing card transactions, typically a percentage of the transaction amount. Currently, the MDR for UPI transactions is capped at 0.30% for Person to Merchant (P2M) transactions. However, since January 2020, the government has made the MDR zero for RuPay Debit Card and BHIM-UPI transactions to stimulate digital adoption.
To facilitate effective service delivery within the payment ecosystem, the government has implemented this incentive scheme, which will be funded by the government and distributed among various stakeholders, including acquiring banks, issuer banks, and payment service providers. This collaborative approach aims to ensure that all participants in the digital payment landscape benefit from the increased transaction volume.
Scheme Overview and Objectives
The newly approved incentive scheme will be operational from April 1, 2024, to March 31, 2025, with a focus on UPI transactions of up to ₹2,000. The initiative targets small merchants to foster the adoption of digital payments at the grassroots level. Recent statistics indicate a remarkable increase in UPI transactions, with the total transaction value soaring from ₹21.3 lakh crore in FY 2019-20 to ₹213.8 lakh crore by January 2025. Notably, P2M transactions have surged to ₹59.3 lakh crore, reflecting a growing trend among merchants to embrace digital payment methods.
The scheme aims to achieve several key objectives, including promoting the BHIM-UPI platform to reach a transaction volume of ₹20,000 crore in FY 2024-25, strengthening payment infrastructure, ensuring system reliability, and expanding UPI services in rural areas through innovative tools like UPI 123PAY and UPI Lite.
Incentive Structure and Benefits for Merchants
The incentive structure under the new scheme is tailored to benefit small merchants significantly. For transactions up to ₹2,000, merchants will enjoy zero MDR and receive an incentive of 0.15% of the transaction value. Transactions exceeding ₹2,000 will have zero MDR but will not qualify for any incentive. Large merchants will also benefit from zero MDR on all transactions, although they will not receive any incentives.
The reimbursement mechanism for acquiring banks is designed to ensure timely disbursement of funds. Eighty percent of the admitted claim amount will be paid unconditionally each quarter, while the remaining 20% will depend on performance criteria, including technical decline rates and system uptime. This structured approach aims to maintain high service standards and reliability in the digital payment ecosystem.
Merchants stand to gain numerous advantages from the scheme, including enhanced cash flow, the elimination of extra charges for digital payments, and support for small businesses in adopting UPI. The initiative also promotes a less-cash economy, encouraging formal and accountable transactions while ensuring efficient payment services.
Global Expansion and Future Prospects
India’s digital payment landscape is not only thriving domestically but is also gaining international recognition. UPI and RuPay have expanded to seven countries, including the UAE, Singapore, and France, marking a significant milestone in India’s digital payment journey. The ACI Worldwide Report 2024 highlights India’s dominance in global real-time transactions, accounting for 49% of the total in 2023. The approved incentive scheme for FY 2024-25 represents a pivotal step in advancing India’s digital economy. By supporting the use of BHIM-UPI among small merchants and enhancing the financial infrastructure, the government aims to ensure that businesses of all sizes can benefit from seamless, secure, and cost-effective cashless transactions. As India continues to lead in digital payment innovation, the focus remains on fostering financial inclusion and empowering merchants across the nation.
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