Indian govt deducts funding for RuPay and BHIM-UPI incentive scheme in Budget 2025

In a move that has drawn attention across the country’s digital payments sector, the government has sharply reduced its budget for incentives aimed at promoting RuPay debit cards and low-value BHIM-UPI transactions.

Official budget documents show that allocations for this initiative have fallen from Rs 2,484.97 crore in the 2023-24 fiscal year to a projected Rs 437 crore in the 2025-26 fiscal year, reflecting an 82% decline over two years.

Funding slashed despite earlier boosts

For the 2024-25 fiscal year, the government had initially set aside Rs 1,441 crore in incentives, later increasing it to Rs 2,000 crore. These incentives have been crucial for small and mid-level payment providers, who rely on government reimbursements to offset costs they face due to the zero Merchant Discount Rate policy on transactions under Rs 2,000.

The government removed MDR charges on UPI in 2019 to push digital payments, which meant banks, app providers, and other stakeholders could no longer recover processing costs directly from users or merchants. By compensating them through incentives, the government ensured a level playing field in a market dominated by a few large players.

Significance of the zero MDR regime

Low-value UPI transactions, capped at Rs 2,000 for zero-cost processing, have become the backbone of India’s digital payment landscape, particularly for small businesses and everyday consumer purchases.

Transactions above Rs 2,000 still draw an MDR of around 1%, but the bulk of the country’s digital payments involve smaller amounts. Because of the zero MDR policy, every participant in the transaction chain—payer’s bank, beneficiary’s bank, app providers, and the National Payments Corporation of India (NPCI)—incurs a cost of nearly 0.25% of the transaction’s value.

Government incentives helped reimburse these expenses, but as UPI becomes more mainstream, allocations have started to decrease.

Last year, the government had first earmarked Rs 1,441 crore, revised it to Rs 2,000 crore, and is now allocating Rs 437 crore for the coming fiscal year. There is a possibility that more funds could be added later, depending on the situation.

UPI’s meteoric rise

Unified Payments Interface (UPI) has seen an astonishing surge in usage, expanding its share in the digital payments ecosystem from 34% in 2019 to 83% in 2024, according to the Reserve Bank of India’s payment system report.

In December 2016, the total value of UPI transactions stood at Rs 707.93 crore; by December 2024, that figure had soared to Rs 23.24 lakh crore.

The number of transactions also rose to 16,730.01 million in December 2024, compared with 2,234.16 million in December 2020. UPI is now live across seven countries, including the UAE, Singapore, Bhutan, Nepal, Sri Lanka, France, and Mauritius, showcasing India’s growing influence in the global digital payments landscape.

Calls to revisit zero MDR

With the UPI market now deeply embedded in everyday commerce, there have been suggestions that the government should reconsider the zero MDR regime.

Critics argue that continuing to offer this service free of charge places a long-term strain on stakeholders. However, supporters feel that zero MDR has allowed UPI to grow at an unprecedented rate, making India a global leader in real-time digital payments. 

Despite the reduced budget allocation, the digital payments sector is expected to keep growing rapidly. The new deadline for regulatory compliance and the potential for additional government funding may help maintain a competitive environment, ensuring that UPI transactions remain a convenient choice for millions of Indians every day.