UPI fee: Why govt is putting a price on big merchant payments

NEW DELHI: The government is putting a price for merchants using its flagship digital payment network to accept large transactions - a shift that follows years of warnings from the payment industry that the annual subsidy budgeted for the Unified Payments Interface (UPI) never came close to covering the real cost of running it.

From October 15, a 0.4 per cent Merchant Discount Rate (MDR) will apply to person-to-merchant UPI payments above Rs 2,000. The charge will be paid by merchants, not consumers, and will be capped at Rs 300 for transactions of Rs 75,000 or more. Payments between individuals, as well as the vast majority of everyday merchant payments, will remain free.

The National Payments Corporation of India, which operates the UPI network, said the revenue will support investment in infrastructure resilience, cybersecurity, fraud prevention, innovation and customer service.

"The MDR is distributed only amongst the UPI ecosystem, to further invest into infrastructure resilience, innovation, cybersecurity (protecting the UPI infrastructure with banks and non-banks) and customer service," it said.

WHY NOW?

The move ends a zero-MDR regime that has been in place since January 2020, when the government scrapped merchant fees on UPI and RuPay debit card transactions to accelerate digital-payments adoption, compensating banks and fintechs instead through an annual budgetary incentive scheme.

Since then, UPI has grown far beyond the scale envisaged. The network processed 2,451 crore transactions valued at Rs 29.9 lakh crore in August 2026. At that scale, the cost of keeping the system reliable, secure and capable of handling ever-higher volumes has also risen.

NPCI has said industry estimates put the annual cost of operating UPI - servers, bandwidth, fraud prevention and bank technical support - at roughly Rs 20,000 crore a year. The Department of Financial Services separately told Parliament's Standing Committee on Finance that the payments industry spends about Rs 20,700 crore annually on P2M transactions alone.

A parliamentary committee report in March flagged that the absence of an MDR was making UPI financially difficult to sustain.

Against that, the government's actual subsidy outlay to compensate banks for providing UPI and RuPay payments without merchant fee has been a fraction of the estimated cost. The highest budgetary outgo was Rs 3,631 crore in FY2023-24. The Budget Estimate for FY2025-26, however, was just Rs 437 crore, although the eventual payout was raised to about Rs 2,196 crore.

The allocation for FY2026-27 is Rs 2,000 crore.

That gap between the cost of running an expanding payment network and the government's willingness or ability to fund it has been one of the reasons the payments industry has pushed for a regulated MDR.

Even in its best year, the subsidy has covered roughly a tenth of what industry says the network costs to run. NPCI, in its FAQ on the new framework, described the annual incentive as "short-term bridge funding rather than a permanent measure," adding that relying solely on budget allocations "creates funding uncertainty and limits long-term technology investments by banks and fintechs."

The Payments Council of India had pressed for years for the right to levy a controlled MDR on larger merchants rather than continue depending on the government dole.

WHAT EXACTLY CHANGES?

The 0.4 per cent MDR applies to UPI payments above Rs 2,000 made to merchants.

A Rs 5,000 payment would therefore generate an MDR of Rs 20, while a Rs 50,000 payment would generate Rs 200. At Rs 75,000, the 0.4 per cent calculation reaches Rs 300, after which the fee is capped.

Essential services - railways, telecom, fuel and insurance - get a flat Rs 5 fee per transaction above Rs 2,000.

Capital markets transactions (mutual funds, stockbroking) get a lower 0.02 per cent rate, also capped at Rs 300.

Small merchants collecting up to Rs 1 lakh a month via UPI QR codes remain fully exempt from any new charge - a carve-out officials say shields about 96 per cent of all merchant transactions.

UPI QR payments to merchants in rural and semi-urban areas will also remain free. Five per cent of MDR collections will go into a dedicated fund intended to expand UPI acceptance among small merchants.

WILL CONSUMER PAY?

Not directly.

NPCI has said that the MDR cannot be passed on to consumers. The government has also said UPI app providers cannot impose platform fees or hidden charges, while banks have been advised to ensure merchants do not pass the MDR on to customers.

The economic effect on consumers will nevertheless depend on how merchants respond to the new cost. A merchant that absorbs the MDR takes a small hit to its margin; one that adjusts prices or changes payment incentives could indirectly shift some of the cost.

WHY RS 2,000 THRESHOLD?

The threshold preserves the zero-MDR model for the vast majority of small-value transactions while monetising higher-value merchant payments.

It also maintains the policy objective behind the original zero-MDR regime: keeping digital payments cheap enough for small merchants and consumers to adopt widely.

The government has continued to fund incentives for low-value UPI payments.

The FY2026-27 Budget allocated Rs 2,000 crore for incentives covering low-value BHIM-UPI and RuPay debit-card transactions.

THE SCALE OF WHAT'S BEING TAXED

UPI in full FY2025-26 handled 24,161.69 crore transactions worth roughly Rs 314 lakh crore, according to Ministry of Finance data - up from 1.78 crore transactions worth Rs 0.07 lakh crore in FY2016-17, the year UPI was launched. The number of banks live on the platform rose from 44 to 703 over the same period.

Within that total, the ministry's breakdown shows two very different transaction patterns:

P2M (person-to-merchant): 63 per cent of total transaction volume, but a smaller share of value. Around 86 per cent of P2M transactions were below Rs 500 - small, everyday payments such as bus fares, tea stalls and vegetable vendors.

P2P (person-to-person): 37 per cent of volume but 71 per cent of total transaction value - rent, salaries, remittances and larger transfers between individuals. About 59 per cent of P2P transactions were also below Rs 500.

The new fee is narrowly targeted: government data shows only around 4 per cent of P2M transactions were above the Rs 2,000 threshold in FY2025-26, but this thin slice accounted for close to two-thirds of total UPI payment value - which is why officials describe the new MDR as hitting high-value merchant transactions while leaving the overwhelming majority of daily UPI usage untouched.

THE BACKGROUND

UPI, built by NPCI under Reserve Bank of India's oversight, was launched in August 2016. In January 2020, Parliament amended the Payment and Settlement Systems Act, 2007, and the Income-tax Act, 1961, to make MDR zero on RuPay debit cards and UPI transactions - a move credited with turbo-charging adoption but one that shifted the entire cost of running the network onto banks, apps and the exchequer.

UPI now accounts for the bulk of India's digital payments and is used in several other countries, including the UAE, Singapore, Sri Lanka, Nepal, Bhutan, Mauritius, Qatar and France.

The revised MDR framework follows the passage of the Taxation and Other Laws (Amendment) Bill, 2026, and comes after months of industry lobbying and a parliamentary panel's warning about UPI's financial sustainability.

THE BIGGER PICTURE

The new MDR is less a charge on UPI users than a change in who pays for the infrastructure behind India's most widely used digital payments network.

The government's earlier model kept merchant payments free and compensated banks through budgetary incentives. With UPI now processing billions of transactions a month, the policy introduces a second track alongside that: keep payments free for individuals and smaller merchants, while letting the ecosystem monetise larger commercial transactions directly.

For the roughly 55 crore Indians using UPI and the vast majority of small merchants, nothing changes - payments stay free.

For larger merchants processing high-value transactions, and for the payment companies and banks that have absorbed UPI's costs for six years, October 15 marks a shift from a subsidy-dependent model towards one where big-ticket transactions help fund the network's own upkeep - even if the government's Rs 2,000 crore FY2026-27 allocation remains well short of the Rs 20,000 crore industry says is needed for UPI's longer-term sustainability.