The Indian government has launched an incentive scheme to promote low-value person-to-merchant (P2M) transactions via the BHIM-UPI platform. The initiative aims to keep the Unified Payments Interface (UPI) ecosystem affordable and accessible, particularly for small merchants.
Incentive Scheme Structure and Outlay
The incentive scheme has an outlay of approximately Rs 1,500 crore for the financial year 2024-25. Under this, the acquiring bank—also known as the merchant’s bank—will receive an incentive at the rate of 0.15% per transaction for UPI payments valued at less than Rs 2,000. The incentive will then be distributed among other stakeholders, including the issuer bank (customer’s bank), payment service providers (PSPs), and third-party application providers (TPAPs).
According to the National Payments Corporation of India (NPCI), small merchants eligible under this scheme are those with a projected monthly inward UPI transaction value of Rs 50,000 or less.
Impact on MDR and Digital Transactions
Merchant Discount Rate (MDR) is a fee banks and payment processors charge merchants for processing digital transactions. The Reserve Bank of India (RBI) permits an MDR of up to 0.90% on debit card transactions, while NPCI allows an MDR of up to 0.30% on UPI P2M transactions. However, since January 2020, the government has set the MDR at zero for RuPay debit card and BHIM-UPI transactions to encourage digital payments.
This new incentive scheme will encourage banks and PSPs to refrain from charging MDR for small-value UPI transactions. Merchants will no longer bear this cost, ensuring that consumers avoid additional charges when making payments below Rs 2,000.
Benefits for Small Businesses and Consumers
The incentive scheme is expected to encourage more small merchants, especially those in the unorganised sector, to adopt digital payments. Many small business owners hesitate to accept online payments due to concerns over transaction costs and technical challenges. Shams Tabrej, CEO of Ezeepay, highlighted how the incentive scheme could address these issues. “This programme nudges small businesses towards UPI adoption while also providing a financial incentive to do so,” he noted.
The initiative also prioritises system efficiency. Twenty percent of the incentive payout depends on banks maintaining a high uptime and minimising transaction failures. Specifically:
- 10% of the incentive is tied to the acquiring bank maintaining a technical decline rate of less than 0.75%.
- Another 10% is awarded if the acquiring bank maintains a system uptime of at least 99.5%.
For consumers, the scheme promotes seamless digital transactions. With UPI emerging as the preferred mode of payment for low-value purchases, this initiative aims to enhance financial inclusion and digital literacy. Tabrej added, “UPI transactions will become more mainstream, making digital payments an everyday habit rather than an exception.”
Implications for Merchants and Industry Programs
The incentive scheme primarily benefits small merchants. The scheme does not cover large merchants and transactions above Rs 2,000. Additionally, the government will unconditionally disburse 80% of all claims made by acquiring banks, while the remaining 20% will depend on meeting the uptime and decline rate conditions.
Previously, as per an NPCI circular dated 23 December 2021, the government provided an incentive of 0.15% per transaction for industry programs such as insurance, education, railways, and utility payments. Earlier, industry programs received a 0.25% incentive, but the new scheme has standardised the rate at 0.15% across all sectors.
Strengthening Digital Payment Infrastructure
UPI continues to see rapid adoption, with over 14 billion transactions recorded in February 2025 alone. Rohit Mahajan, Managing Partner and Founder of Plutos ONE, believes the scheme will accelerate the use of digital payment methods among small merchants. “This initiative will further strengthen India’s leadership in digital payments by incentivising UPI adoption at the grassroots level,” he said.
The government’s latest move aims to reinforce digital payment accessibility while ensuring financial viability for all stakeholders in the UPI ecosystem. The scheme will drive further digital adoption across the country by removing MDR charges for small merchants and incentivising efficient transaction processing.
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