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

With a focus on expanding UPI infrastructure in rural and semi-urban areas, the scheme incorporates tools such as UPI 123PAY, Lite, and LiteX. According to the ACI Worldwide Report 2024, India accounted for 49% of all global real-time transactions in 2023, reinforcing its position as a global leader in digital payment innovation. 

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 the financial year 2024-25. This initiative aligns with the government’s vision of boosting digital transactions, encouraging small merchants to adopt UPI, and promoting financial inclusion. 

Digital payments have become a crucial component of the government’s financial inclusion strategy, offering citizens a range of secure and accessible payment options. The cost of digital payment services, typically recovered through the Merchant Discount Rate (MDR), is a fee paid by businesses to payment processing companies for debit or credit card transactions. 

The Reserve Bank of India has set an MDR of up to 0.90% on all debit card networks, while the National Payments Corporation of India (NPCI) has capped MDR at 0.30% for UPI P2M transactions. Since January 2020, to incentivize digital payments, MDR has been set at zero for RuPay Debit Card and BHIM-UPI transactions through amendments to the Payments and Settlement Systems Act, 2007, and the Income-tax Act, 1961. 

To support payment ecosystem participants in delivering seamless services, the government has implemented the Incentive Scheme for the Promotion of RuPay Debit Cards and Low-Value BHIM-UPI Transactions (P2M), with the approved incentive amount being distributed among acquiring banks, issuer banks, payment service provider banks, and app providers. 

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

Over recent years, UPI transactions have grown significantly, with the total transaction value 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 expanded, reaching ₹59.3 lakh crore, indicating a steady rise in digital payment adoption. 

The scheme seeks to promote the BHIM-UPI platform by aiming for ₹20,000 crore in transaction volume during FY 2024-25. It also aims to strengthen the payment infrastructure by ensuring high uptime, reducing technical failures, and extending UPI services to remote areas, including tier 3 to tier 6 cities. The expansion will be facilitated through UPI 123PAY for feature phones and UPI Lite and LiteX for offline payments. 

Under the approved framework, incentives will be structured based on the merchant category and transaction value. Small merchants processing UPI transactions up to ₹2,000 will continue to enjoy zero MDR while receiving a 0.15% incentive on the transaction amount. Transactions above ₹2,000 will remain exempt from MDR but will not be eligible for incentives. Large merchants will also have zero MDR but will not qualify for incentives, regardless of transaction value. 

The reimbursement mechanism ensures that 80% of the admitted claim amount by acquiring banks will be disbursed unconditionally each quarter. The remaining 20% will be disbursed based on performance benchmarks, with 10% contingent on an acquiring bank maintaining a technical decline rate of less than 0.75% and the other 10% tied to system uptime exceeding 99.5%. 

For merchants, the scheme offers multiple advantages, including convenience, speed, and access to digital credit. With no extra charges for digital transactions, small businesses are encouraged to accept UPI payments, fostering a less-cash economy with formalized and accountable transactions. Ensuring high uptime and low failure rates guarantees reliable, round-the-clock digital payment services.