A Parliamentary Standing Committee on Finance has suggested exploring a tiered charging structure for UPI transactions. It proposed that while street vendors and small businesses continue to receive free services, banks and larger entities could be charged to help make the system financially sustainable.
The suggestion comes amid discussions on the long-term viability of India’s fast-growing digital payments ecosystem built around the Unified Payments Interface (UPI).
Balancing Public Utility
Responding to the panel, the Department of Financial Services (DFS) said the government’s current zero Merchant Discount Rate (MDR) policy for UPI and RuPay debit card transactions, introduced in January 2020, aimed to accelerate digital payments adoption and promote a less-cash economy. MDR is the fee merchants pay payment service providers for processing digital transactions; it helps cover costs related to settlement, infrastructure, and payment processing.
Incentive support constitutes only 11% of the cost incurred by the industry and 14% of the potential MDR collected by the industry. The government has allocated Rs 2,000 crore in the budget for FY27 compared with Rs 2,200 crore for FY26.
However, DFS acknowledged that the absence of MDR makes the UPI ecosystem financially challenging. To address this, the government launched the “Incentive Scheme for Promotion of RuPay Debit Cards and Low-Value BHIM-UPI Transactions (P2M)” in FY2021-22. The scheme compensates banks, payment system operators and app providers by paying them a percentage of the transaction value for RuPay debit card and low-value UPI merchant payments of up to Rs 2,000.
The incentive support has been crucial for sustaining the digital payments infrastructure. The DFS said the incentive component accounts for only around 11% of the costs incurred by the industry and about 14% of the potential MDR revenue that could have been collected if charges were allowed.
The department also highlighted disparities in digital payments adoption across regions. Urban penetration has grown rapidly, while adoption in rural and underserved areas remains relatively limited. To address this imbalance, the government has included a cashback component in the scheme to expand acceptance infrastructure and promote digital transactions in untapped geographies.
DFS further noted that stakeholders in the UPI ecosystem are investing heavily in technology, cybersecurity, distribution, and customer support. A multi-year incentive framework has therefore been introduced to enable better planning of capital expenditure and expansion into unbanked regions.
While the annual growth in UPI transaction volumes is expected to slow to about 25% in FY2025-26 from 42% in FY2024-25, the department said the system still has the potential to expand tenfold. Over the next five to seven years, UPI could add around 600 million new users, including both smartphone and feature-phone users, and handle 100–150 billion transactions per month.
Addressing Infrastructure Costs
DFS cautioned that without adequate budgetary support, the ecosystem could face a structural funding gap, potentially affecting innovation, merchant onboarding and expansion into smaller towns and rural areas. It maintained that continued government support remains essential to ensure uninterrupted services and to deepen digital payment adoption across the country.