Last week, Lok Sabha passed a Bill enabling the government to levy a fee on UPI payments. While the government says most transactions would remain free, concerns persist over whether even a merchant-side fee could take some of the shine off India’s most popular payment mode, writes Banasree Purkayastha
l What does the Bill propose?
LOK SABHA HAS passed the Taxation and Other Laws (Amendment) Bill, 2026 to amend the Payment and Settlement Systems Act, 2007, creating a legal framework for the government to allow charges on payments through Unified Payments Interface (UPI) and other notified electronic payment modes. The existing Section 10A of the Payment and Settlement Systems Act prohibits banks and payment service providers from imposing charges on electronic modes of payment prescribed under Section 269SU of the Income Tax Act. The Bill does not announce any fee or timeline for introducing any charges.
Since January 2020, Merchant Discount Rate (MDR) charges are not applicable for UPI and RuPay debit card payments. MDR, regulated by the Reserve Bank of India, is a fee paid by merchants to banks, card networks, point-of-sale providers for offline transactions, and payment gateways for digital payments. The UPI and Services Steering Committee, headed by National Payments Corporation of India (NPCI), will examine the matter only after Parliament passes the Bill.
l How much could a potential levy on UPI transactions be?
THE GOVERNMENT HAS said that as and when MDR charges are introduced, they will apply only to a limited set of merchant transactions, above a certain threshold, at a nominal rate, far lower than debit or credit card MDRs.
A levy of 0.25% to 0.35% as MDR on payments above Rs 2,000 to businesses could be a possibility, as per industry estimates. While the Rs 2,000 threshold would cover only 5% of UPI transactions, these account for around 65% of the total value processed on the UPI platform.
Earlier this year, a Parliamentary Standing Committee on Finance had suggested protecting individuals and small merchants from any levy while considering reasonable charges for large commercial establishments and e-commerce platforms. MDR on credit cards can go up to as high as 3% of the transaction value. Debit card transactions of up to Rs 20,000 attract a maximum MDR of 0.4% and 0.9% above that threshold.
l Why is there a rethink on MDR for UPI?
WHILE THE UPI platform is the largest digital payment system by volume in the world, maintaining the infrastructure requires significant investment. Banks, payment firms and NPCI, which maintains the UPI platform, need to spend on technology upgrades, cybersecurity, fraud prevention and transaction processing systems.
Industry estimates suggest the annual cost of operating UPI and RuPay debit card infrastructure to be at least `10,000 crore. According to a recent report by the Parliamentary Standing Committee on Finance, the government’s incentive scheme — covering low value BHIM-UPI merchant transactions and promoting RuPay debit cards — from 2021-22 to 2024-25 accounted for “only 11% of the cost incurred by the digital payment industry”.
That makes the long-term viability of the current business model difficult. Reliance on subsidies alone is not enough for the next wave of growth. A balanced framework is required to ensure that UPI remains resilient against emerging risks as well as inclusive and future-ready.
l Will consumers end up paying the charges?
IT IS THE merchant who is liable to pay the MDR and not the consumer. Consumers making payments will not face any transaction charges. All person-to-person transactions will also continue to be free of charge, the government has said. There will not be a blanket levy on all merchants or all transactions. PCI has also said that small traders, including kirana stores, would continue to accept UPI payments without paying any MDR.
However, there’s a fear that while larger merchants may absorb the fee like they do for credit card MDR, many retailers operating on thin margins could pass on the charges to the consumer or prefer cash payments. The zero-MDR policy is seen as a key factor behind UPI’s phenomenal growth. Over the last decade, there has been a strong shift to UPI payments, and even a minimal MDR on a limited set of transactions could change that behaviour. “Any MDR on UPI will kill the one thing in India which is working like clock work, i.e., mobile payments. It’s a regressive step — government should reconsider,” Ashneer Grover, former founder of BharatPe, posted on X.
l How big is the UPI universe?
IN FY 2025-26, more than 240 billion UPI transactions totalling Rs 314 lakh crore were made. Transaction volumes in July 2026 rose 22% year-on-year
to 23.66 billion, while the total value of payments touched an all-time high of Rs 29.88 lakh crore, as per data shared by NPCI. Two players – PhonePe and Google Pay — account for 80% of all UPI transactions. Last year, PCI said around 60 million merchants in India accept digital payments. Of these, about 90% are small merchants with an annual turnover of up to Rs 20 lakh.
Disclaimer: This article is for informational purposes only and should not be construed as investment advice. Investors should assess their financial goals, risk appetite and consult a qualified financial advisor before making investment decisions.
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