The Union Cabinet approved a Rs 1,500 crore incentive scheme on March 19, 2024, to promote small-value BHIM-UPI transactions in FY 2024-25. The scheme aims to accelerate digital payment adoption, particularly among small merchants, by incentivizing transactions up to Rs 2,000. Merchants will receive a 0.15% incentive per transaction, ensuring cost-free digital transactions for price-sensitive businesses.
Government’s Digital Push: UPI Incentive Scheme to Boost Small Transactions in FY25
This initiative, effective from April 1, 2024, to March 31, 2025, is part of the government’s broader effort to enhance financial inclusion and reduce cash dependency. While merchants handling payments above Rs 2,000 are excluded from incentives, the scheme targets smaller businesses that remain hesitant about digital payments. To facilitate smooth implementation, acquiring banks will receive 80% of their incentive claims upfront, with the remaining 20% contingent on meeting performance benchmarks, including a technical decline rate below 0.75% and system uptime above 99.5%.
The government also seeks to expand UPI penetration in smaller towns and rural areas through feature phone-based UPI 123PAY and offline solutions like UPI Lite and UPI LiteX. Additionally, the initiative aims to achieve a total transaction volume of Rs 20,000 crore via BHIM-UPI in FY25. UPI transactions continue to grow, with January 2025 recording nearly 1,700 crore transactions worth over Rs 23.48 lakh crore, the highest monthly figure to date.
Industry Concerns Over UPI Incentives: Calls for Higher Allocation and MDR Reform
Despite the initiative, industry stakeholders argue that the Rs 1,500 crore allocation is insufficient for UPI’s ambitious growth. Vishwas Patel, chairman of the Payments Council of India (PCI), criticized the allocation, stating that it falls short of the Rs 5,000 crore expected by the industry. He warned that the limited funds could hinder fintech growth, making it difficult to onboard the next 300 million Indians onto digital payments.
Fintech firms are advocating for the introduction of a merchant discount rate (MDR) on UPI transactions for large merchants. While UPI currently has zero MDR, debit card transactions incur an average of 0.75%, and credit cards around 1.75%. Patel proposed a controlled MDR of 25 BPS for merchants with an annual turnover exceeding Rs 40 lakh while keeping Zero MDR for smaller merchants. The issue was discussed with the RBI governor on March 5, with the regulator considering a pricing mechanism for small and large merchants to ensure the sustainability of the digital payments ecosystem.
