The Union Cabinet has approved the launch of the Urban Challenge Fund (UCF) with a total Central Assistance of Rs 1 lakh crore, aimed at driving market-linked urban infrastructure development and catalysing investments worth around Rs 4 lakh crore over the next five years.
The fund marks a shift in urban development model away from grant-based financing towards “market-linked, reform-driven and outcome-oriented infrastructure creation, according to government statement.
The scheme will be operational from FY 2025–26 to FY 2030–31, with an extendable implementation window till FY 2033–34.
Market-led financing model with reform-linked funding
Under the framework, Central Assistance will cover 25% of the project cost, while at least 50% of funding must be mobilised from market sources such as municipal bonds, bank loans and Public–Private Partnerships (PPPs). The remaining portion can be funded by states, Union Territories, urban local bodies or other sources.
The fund is designed to leverage private investment, strengthen municipal finance systems and improve governance, while supporting citizen-centric urban reforms and high-quality infrastructure delivery.
The PIB statement said the fund aims to create “resilient, productive, inclusive and climate-responsive cities”, positioning urban centres as key drivers of India’s next phase of economic growth.
Rs 5,000 crore credit support to boost smaller cities’ market access
A dedicated Rs 5,000 crore corpus will be used to enhance the creditworthiness of 4,223 cities, including Tier-II and Tier-III urban centres, particularly those accessing market financing for the first time.
The Cabinet has also approved a Credit Repayment Guarantee Scheme of Rs 5,000 crore to support urban local bodies in Northeastern and hilly states, and smaller cities with populations below one lakh.
The scheme will provide a Central guarantee of up to Rs 7 crore or 70% of the loan amount, whichever is lower, for first-time loans. For subsequent loans, the guarantee will be up to Rs 7 crore or 50% of the loan amount.
This is expected to support projects worth at least Rs 20 crore in smaller cities initially and Rs 28 crore in subsequent phases.
Challenge-based project selection
Projects will be selected through a competitive challenge-based framework focusing on transformative impact, sustainability and reform orientation.
Funding will be linked to reform milestones, defined outcomes and performance benchmarks. Continued fund release will depend on sustained reform progress, with monitoring to be carried out through a digital portal of the Ministry of Housing and Urban Affairs.
Focus on growth hubs, city redevelopment and water infrastructure
The fund will support projects across three major verticals:
- Cities as Growth Hubs: Integrated spatial and economic planning, transit-linked development, urban mobility and infrastructure projects to improve economic competitiveness.
- Creative Redevelopment of Cities: Revamp of central business districts, heritage zones, brownfield regeneration, transit-oriented development and climate-resilient urban upgrades.
- Water and Sanitation: Upgradation of water supply, sewerage and stormwater systems, integrated solid waste management, legacy waste remediation and rurban infrastructure.
- Wide coverage across urban centres: The fund will cover all cities with populations of 10 lakh or more, all state and Union Territory capitals, and major industrial cities with populations above one lakh.
Smaller cities, including those in Northeastern and hilly states, will be supported through the credit guarantee component, with the government indicating that “in principle all cities will be covered under UCF”.
Reform-driven urban governance
Funding will be linked to reforms across governance, financial systems, service delivery and urban planning, including digital governance, credit strengthening measures and transit-oriented development.
Projects will be evaluated based on their ability to deliver economic, social and climate outcomes, including revenue generation, private investment mobilisation, job creation, improved safety, inclusiveness and service delivery.
The government expects the Urban Challenge Fund to catalyse large-scale private investment, improve urban governance and accelerate the development of future-ready cities aligned with national development priorities.
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