Union Cabinet clears ‘Urban Challenge Fund’ for cities

The Union Cabinet on Friday (February 13, 2026) approved the launch of the ‘Urban Challenge Fund’ (UCF), a new Centrally sponsored scheme of the Ministry of Housing and Urban Affairs, with a total Central assistance of ₹1 lakh crore.

It aims to support transformative and bankable urban projects through competitive “challenge-mode” as urban infrastructure cannot be funded by public finance alone. Central assistance will cover 25% of project costs, subject to raising a minimum of 50% of the project cost from the market, including municipal bonds, bank loans, and public-private partnerships leading to an expected total investment of ₹4 lakh crore in the urban sector in the next five years.

The UCF marks a paradigm shift in India’s urban development approach from grant-based financing to market-linked, reform-driven and outcome-oriented infrastructure creation, a statement by the government said.

It will leverage market finance, private participation, and citizen-centric reforms for the delivery of high quality urban infrastructure. The fund aims to build resilient, productive, inclusive, and climate-responsive cities, positioning them as a key driver of the country’s next phase of economic growth, the statement added.

The fund will be operational from FY 2025-26 to FY 2030-31, with an extendable implementation period up to FY 2033-34. It gives effect to the government’s vision, announced in the Union Budget 2025-26, to implement proposals relating to ‘Cities as Growth Hubs’, ‘Creative Redevelopment of Cities’, and ‘Water and Sanitation’.

Projects will be selected through a transparent and competitive challenge mode, ensuring support to high-impact and reform-oriented proposals. There will be a strong thrust on reforms across urban governance, market and financial systems, operational efficiency, and urban planning, the statement said.

Private sector participation will be encouraged through structured risk-sharing frameworks and benchmarking of service delivery standards. A dedicated ₹5,000 crore corpus will enhance the creditworthiness of 4,223 cities, including Tier 2 and Tier 3 cities, particularly for first-time access to market finance.

The fund will cover all cities with a population of 10 lakh or more (based on 2025 estimates); all capitals of States and Union Territories that are not included in the above; and major industrial cities with a population of 1 lakh or more. Additionally, all urban local bodies in hilly States and in northeastern States, and smaller urban local bodies 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 UCF.