Cabinet Approves ₹1 Lakh Crore Urban Challenge Fund

New Delhi

The Union Cabinet, chaired by Prime Minister Narendra Modi, has approved the Urban Challenge Fund (UCF), which will provide total central assistance of ₹1 lakh crore. Under the scheme, 25% of the project cost will be provided as Central Assistance (CA), provided that at least 50% of the total project cost is mobilized from market sources.

This initiative is expected to catalyze total urban investment of ₹4 lakh crore over the next five years. It marks a significant shift in India’s urban development approach—from grant-based financing to a market-linked, reform-driven, and outcome-oriented infrastructure model.

Objectives of the Urban Challenge Fund

The Urban Challenge Fund aims to leverage market financing, private participation, and citizen-centric reforms to develop high-quality urban infrastructure. Its objective is to build resilient, productive, inclusive, and climate-friendly cities that can drive the next phase of India’s economic growth.

The fund will remain operational from FY 2025–26 to FY 2030–31, with the implementation period extendable until FY 2033–34.

Financing Structure

At least 50% of project financing must be raised from market sources, including municipal bonds, bank loans, and Public-Private Partnerships (PPP). The remaining funding may be provided by states, Union Territories, Urban Local Bodies (ULBs), or other sources. Projects will be selected through a transparent and competitive challenge-based mechanism to ensure support for high-impact and reform-oriented proposals.

Special emphasis will be placed on reforms in urban governance, financial systems, operational efficiency, and urban planning.

Support for Tier-II and Tier-III Cities

A dedicated ₹5,000 crore facility will enhance the creditworthiness of 4,223 cities, including Tier-II and Tier-III cities, especially those accessing market financing for the first time.

To facilitate first-time access to market funding for cities in the North-Eastern and hill states, as well as small ULBs (with a population below 1,00,000), a ₹5,000 crore Loan Repayment Guarantee Scheme has been approved. The scheme will provide a central guarantee of up to ₹7 crore or 70% of the loan amount (whichever is lower) for first-time borrowings.

Upon successful repayment of the first loan, a central guarantee of up to ₹7 crore or 50% of the loan amount (whichever is lower) will be extended. This mechanism will effectively support projects worth at least ₹20 crore in smaller cities and up to ₹28 crore for subsequent projects.

Reform-Linked Funding and Monitoring

Project selection under the fund will be based on a challenge-driven framework focusing on transformative impact, sustainability, and reform orientation. Allocation of funds will be tied to reforms, targets, and clearly defined outcomes. Continued reforms will be a precondition for further fund releases.

Paperless monitoring of projects and reforms will be enabled through a single digital portal of the Ministry of Housing and Urban Affairs.

Key Focus Areas

The fund will support:

• Development of cities as growth hubs and key economic centers

• Integrated spatial and transit-oriented planning, including green and semi-green areas

• Urban mobility and economic corridor development

• Redevelopment of central business districts and heritage centers

• Brownfield regeneration and transit-oriented development

• Climate-resilient and disaster-mitigation infrastructure

• Decongestion measures, especially in North-Eastern and hill states

• Water supply, sewerage, stormwater systems, rural-urban infrastructure, water grids, and integrated solid waste management with special emphasis on sanitation and legacy waste treatment

Outcome-Based Evaluation

Projects will be evaluated based on their potential to deliver transformative outcomes, including revenue generation, private investment mobilization, job creation, improved safety, inclusivity, service equity, sanitation, and climate resilience.

The Urban Challenge Fund represents a comprehensive reform agenda encompassing governance and digital reforms, financial market strengthening, improved service delivery, operational efficiency, urban planning, green infrastructure, clearly defined Key Performance Indicators (KPIs), third-party verification, and sustained operation and maintenance mechanisms.

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