The Union Cabinet, chaired by Prime Minister Narendra Modi, has approved the launch of a ₹1 lakh crore Urban Challenge Fund (UCF) aimed at catalysing market-led and reform-driven urban infrastructure development across the country.
The Fund, which will be operational from FY 2025–26 to FY 2030–31 with a possible extension till FY 2033-34, marks a significant shift in India’s urban development strategy – from grant-based financing to a market-linked, outcome-oriented model.
Under the scheme, Central Assistance (CA) will cover 25 per cent of project costs, provided that at least 50 per cent of the financing is mobilised from market sources such as municipal bonds, bank loans and Public–Private Partnerships (PPPs). The remaining share will be contributed by states, Union Territories and Urban Local Bodies (ULBs). The initiative is expected to leverage a total investment of ₹4 lakh crore in the urban sector over the next five years.
The Urban Challenge Fund is designed to promote resilient, inclusive and climate-responsive cities while positioning urban centres as engines of economic growth. Projects will be selected through a transparent, competitive challenge mode, with funding linked to clearly defined reforms, milestones and outcomes.
A strong emphasis will be placed on governance reforms, digital transformation, financial strengthening of ULBs, operational efficiency and urban planning improvements, including transit-oriented development and green infrastructure.
Private sector participation will be encouraged through structured risk-sharing frameworks and service delivery benchmarking.
To enhance the creditworthiness of cities – particularly Tier-II and Tier-III urban centres – the Cabinet has also approved a ₹5,000 crore Credit Repayment Guarantee Scheme.
The scheme will provide a Central guarantee of up to ₹7 crore or 70 per cent of the loan amount (whichever is lower) for first-time loans taken by smaller ULBs, including those in northeastern and hilly states and cities with populations below one lakh. For subsequent loans, a guarantee of up to ₹7 crore or 50 per cent of the loan amount will be provided upon successful repayment of the first loan.
The measure is expected to facilitate first-time market access for smaller cities and support projects of at least ₹20 crore initially and ₹28 crore in subsequent phases.
Key project verticals
The Fund will support projects under three major verticals:
* Cities as Growth Hubs: Integrated spatial and economic planning, greenfield and semi-greenfield developments, transit-linked growth, urban mobility and critical infrastructure.
* Creative Redevelopment of Cities: Renewal of central business districts, heritage areas, brownfield regeneration, climate resilience initiatives and measures to decongest cities, especially in northeastern and hilly states.
* Water and Sanitation: Upgradation of water supply, sewerage and stormwater systems, water grids, integrated solid waste management and legacy waste remediation.
The Urban Challenge Fund will cover all cities with populations of 10 lakh or more (as per 2025 estimates), all state and Union Territory capitals not already included, and major industrial cities with populations above one lakh. Smaller ULBs and all cities in northeastern and hilly states will be eligible under the credit guarantee component.
Funding under the UCF will be tied to measurable outcomes, including revenue mobilisation, private investment generation, job creation, service equity, cleanliness and climate resilience. Continued reform implementation will be a prerequisite for the release of subsequent funds, with monitoring to be carried out through a dedicated digital portal of the Ministry of Housing and Urban Affairs.
The Ministry of Housing & Urban Affairs said the Urban Challenge Fund is expected to catalyse large-scale private investment, strengthen urban governance and accelerate the creation of future-ready cities aligned with India’s long-term development priorities.
