To promote the adoption of digital payments, the Indian government has extended the Incentive Scheme for Low-Value BHIM-UPI Transactions (P2M) for another year, from April 1, 2024, to March 31, 2025. With an outlay of ₹1,500 crore, this scheme aims to encourage small merchants to accept digital payments without financial burden.
What is the BHIM-UPI Incentive Scheme?
The scheme offers a 0.15% incentive on every UPI transaction up to ₹2,000 conducted by small merchants. For example, if a customer makes a ₹1,000 UPI payment, the merchant receives an incentive of ₹1.50. This reduces reliance on cash transactions, fostering a cashless economy.
Key Benefits of the Scheme
✔ Encourages small businesses to adopt digital payments. ✔ Eliminates MDR (Merchant Discount Rate) for small transactions. ✔ Banks receive incentives for improved digital infrastructure. ✔ Supports financial inclusion in Tier 3 to 6 cities and rural areas. ✔ Improves transaction security and reduces tax evasion.
How Does the Scheme Work?
Under this scheme, two major stakeholders benefit:
1. Small Merchants
🔹 Receive 0.15% incentive per transaction for payments up to ₹2,000.
🔹 Zero MDR, meaning no transaction fee burden.
🔹 Easier access to credit through digital transaction history.
2. Banks Handling UPI Transactions
🔹 80% of incentives disbursed quarterly without conditions.
🔹 Remaining 20% based on performance, measured by: ✅ Technical declines below 0.75% ✅ System uptime above 99.5%
Why is MDR Waived for Small Merchants?
Merchant Discount Rate (MDR) is the fee charged to merchants for processing digital transactions. Since January 2020, the government has made MDR zero for UPI and RuPay debit card transactions to promote digital adoption.
💡 Example: If MDR was 1%, a merchant would lose ₹1 per ₹100 transaction. By waiving MDR, small businesses save costs while benefiting from incentives.
Impact on Digital Payment Ecosystem
📊 UPI Transactions in FY24:
- 131.12 billion transactions processed
- Total value: ₹200 trillion
- 75% of all digital transactions in India now happen via UPI
Despite these impressive numbers, experts believe the ₹1,500 crore budget is insufficient to sustain rapid UPI growth.
🗣 Industry View:
“With zero MDR and only ₹1,500 crore allocated, the digital payments industry lacks sufficient funds for scaling. The government should allow controlled MDR for merchants with turnover above ₹40 lakh while continuing incentives for smaller businesses.” – Vishwas Patel, Chairman, Payments Council of India
Compliance Requirements for Banks
To receive the full incentive amount, acquiring banks must:
📌 Maintain technical failure rates below 0.75%
📌 Ensure 99.5%+ system uptime
📌 Expand UPI penetration in rural and semi-urban areas
Challenges & Future Scope
🚨 Challenges
❌ Low funding: ₹1,500 crore may not be enough to cover transaction processing costs.
❌ No MDR earnings for banks, leading to sustainability concerns.
❌ High compliance costs for digital payment service providers.
🚀 Proposed Solutions
✔ Allow a controlled MDR (0.25%) for large merchants while keeping small merchants incentivized.
✔ Increase budget allocation to ₹5,000 crore to sustain UPI ecosystem growth.
✔ Expand feature-phone UPI options (UPI 123PAY) and offline UPI Lite for deeper penetration.
A Step Forward in India’s Digital Economy
The BHIM-UPI incentive scheme ensures small merchants can embrace digital payments without financial burden, helping India move closer to a cashless economy. However, industry experts call for higher funding and sustainable revenue models to keep the digital payment ecosystem thriving.
Key Takeaways for Business Owners & Professionals:
🔹 0.15% incentive for small merchants on UPI transactions up to ₹2,000.
🔹 Zero MDR continues for small businesses, easing digital adoption.
🔹 Banks incentivized for maintaining low technical failures and high uptime.
🔹 Government aims to boost UPI penetration in rural and semi-urban areas.
🔹 Future success depends on sustainable funding and controlled MDR implementation.
The scheme is a major boost for digital inclusion, but scalability and sustainability remain key concerns for stakeholders. 🏦📲