New Delhi, February 14 In a major boost to urban infrastructure, the Union Cabinet has approved the launch of the Urban Challenge Fund (UCF) with a total central assistance of Rs 1 lakh crore, Union Minister Ashwini Vaishnaw said on Saturday.
Under the scheme, central assistance will cover 25 per cent of a project's cost, provided that at least 50 per cent of the funding is mobilized from the market.
In a statement, the government said the initiative will lead to a total investment of Rs 4 lakh crore in the urban sector over the next five years.
This move marks a paradigm shift in India's urban development approach from grant-based financing to a market-linked, reform-driven and outcome-oriented infrastructure creation, it said.
The UCF will leverage market financing, private sector participation, and citizen-centric reforms to deliver high-quality urban infrastructure, it said.
The fund aims to build resilient, productive, inclusive, and climate-responsive cities, positioning them as key drivers of the country's next phase of economic growth, according to the statement.
The UCF will be operational from FY 2025-26 to FY 2030-31, with an extendable implementation period up to FY 2033-34.
This implements the government's vision announced in Budget 2025-26 to implement proposals relating to cities as growth hubs, creative redevelopment of cities, and water and sanitation.
According to the government, a minimum of 50 per cent of project financing must be mobilized from market sources, including municipal bonds, bank loans, and Public-Private Partnerships (PPPs). The remaining share can be contributed by states, Union Territories, Urban Local Bodies (ULBs) or other sources.
Projects will be selected through a transparent and competitive challenge mode, ensuring support to high-impact and reform-oriented proposals, it said.
The fund will cover cities with a population of 10 lakh or more (2025 estimates); all state and Union Territory capitals not included in that category, and major industrial cities with a population of 1 lakh or more, the statement said.
Additionally, all ULBs in hilly and northeastern states, as well as smaller ULBs with a population below 1 lakh, will be eligible for support under the Credit Repayment Guarantee Scheme. In principle, all cities will be covered under the UCF, it said.
"Projects will be evaluated on their ability to deliver transformative outcomes – economic, social, and climate, including revenue mobilization, private investment, job creation, improved safety, inclusiveness, service equity, and cleanliness," it said.
The UCF is expected to catalyse large-scale private investment, strengthen urban governance, and accelerate the creation of future-ready cities aligned with national development priorities, it said.
To facilitate first-time access to market finance for cities/ULBs in northeastern and hill states, and for smaller ULBs (with population less than 1 lakh) in other states/UTs, a Credit Repayment Guarantee Scheme of Rs 5,000 crore has been approved.
The scheme will provide a central guarantee of up to Rs 7 crore or 70 per cent of the loan amount, whichever is lower, for first-time loans.
Upon successful repayment of the first loan, a central guarantee of Rs 7 crore or 50 per cent of the loan amount, whichever is lower, will be provided.
This will effectively support projects of a minimum of Rs 20 crore for the first time and Rs 28 crore for subsequent projects in smaller cities.
According to the government, projects under the fund will be selected through a challenge-based framework including transformative impact, sustainability, and reform orientation.
