India’s debate over how to fund its fast-growing Unified Payments Interface is moving from a question of whether the system should remain entirely free to a more targeted question: which merchant transactions, if any, should carry a fee.
A parliamentary finance panel has urged the government to move quickly toward a calibrated Merchant Discount Rate (MDR) for higher-value digital payments, arguing that the current funding model is becoming difficult to sustain as UPI volumes and infrastructure costs rise. The recommendation follows recent legislative changes that, according to parliamentary reporting, give the government room to notify charges for selected digital-payment transactions rather than maintaining a blanket statutory prohibition.
What is changing in the UPI fee debate?
MDR is the fee a merchant pays to the payment ecosystem for accepting a digital transaction. UPI has operated under a zero-MDR framework for prescribed payment modes, which helped accelerate adoption but left banks and payment companies dependent on incentives and other revenue streams to cover processing, fraud-management, cybersecurity and infrastructure costs.
The existing Payment and Settlement Systems Act contains Section 10A, which prohibits banks and system providers from imposing charges on people making or receiving payments through electronic modes prescribed under Section 269SU of the Income-tax Act. Recent parliamentary changes have opened the door to a more selective framework, but a final MDR rate, transaction threshold and detailed implementation structure have not yet been officially notified.
That distinction matters: UPI has not suddenly become a paid service for consumers. Finance Minister Nirmala Sitharaman has said UPI payments will remain free for consumers and that small traders such as street vendors and other low-value merchants will be protected from the proposed merchant fee framework.
The economics behind the push
The parliamentary panel’s concern is the widening gap between the cost of operating UPI and the public support available to the ecosystem. Recent reporting on the committee’s recommendations puts annual operating costs at about ₹20,700 crore, while the government’s budgetary support is around ₹2,000 crore. The panel has therefore argued for a tiered model that could generate revenue from larger commercial transactions without undermining everyday person-to-person payments or small merchants.
The debate has become more important because UPI is no longer a small payments experiment. Government data shows that UPI processed 24,161.69 crore transactions in FY2025-26, worth ₹314.23 lakh crore. By June 2026, 55.49 crore users had been onboarded to the platform. A separate Ministry of Finance review said UPI accounted for about 85% of India’s digital-payment volume in FY2025-26 and had 703 banks live on the network by March 2026.
At that scale, even a narrow merchant-side fee applied only to selected high-value transactions could materially change the economics of banks, payment service providers and other companies that support UPI infrastructure.
Why this matters for fintech companies
For the payments industry, the central issue is not simply whether MDR returns. The more consequential question is how the government designs the framework.
A tiered model could create a direct revenue stream for processing high-value merchant payments while preserving free access for consumers and smaller businesses. That could give banks and payment providers more room to invest in fraud prevention, dispute handling, uptime, security and product development as UPI usage continues to expand.
But the design will need to be precise. A fee that is too broad could discourage merchants from accepting digital payments or encourage them to pass costs to customers. A fee that is too narrow may not materially improve industry economics. The eventual policy will therefore have to balance three goals that can pull in different directions: affordability for merchants, free or low-cost access for consumers, and a sustainable business model for the institutions running the payments infrastructure.
What to watch next
The next decisive step will be the government notification that defines the actual charging regime. Market participants will be watching for the transaction-value threshold, the merchant categories covered, the MDR rate, exemptions for smaller businesses, and how fee revenue is distributed across banks and payment providers.
Until those details are published, the current development should be read as a policy shift toward enabling a targeted merchant-fee framework—not as the introduction of a universal charge on UPI transactions.
Sources
- Times of India: Parliamentary panel recommendation on high-value UPI MDR
- Times of India: Finance Minister on consumer and small-trader protections
- Press Information Bureau: UPI users and FY2025-26 transaction data
- Press Information Bureau: Ten years of UPI and ecosystem statistics
- India Code: Payment and Settlement Systems Act, 2007
