UPI MDR charges must balance financial viability: The Supreme Court’s refusal to stay the proposed merchant discount rate (MDR) on certain Unified Payments Interface (UPI) transactions has left the debate over digital payment charges unresolved. The legal challenge continues, and the government’s plans for implementation remain subject to confirmation. At issue is a question that India’s rapid shift to digital payments has long deferred: who should pay for the infrastructure that makes UPI work, and how much of that cost should merchants bear?
A customer buying a ₹40,000 refrigerator may complete payment by scanning a QR code, with the money transferred in seconds. The transaction depends on bank servers, payment switches, fraud monitoring, cybersecurity and settlement systems, all of which cost money to operate. UPI has made these arrangements almost invisible to the customer. Yet as transaction volumes rise, the cost of maintaining the network cannot remain an afterthought. Any decision to charge merchants must account for the economics of their businesses, particularly those that operate on thin margins.
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UPI processed 24.51 billion transactions worth ₹29.82 lakh crore in August 2026, across 752 banks, according to the National Payments Corporation of India (NPCI). Its significance extends beyond the volume of payments. The zero-MDR model helped make digital payments accessible to small shops and street vendors, many of whom needed little more than a bank account and a printed QR code. Lower dependence on cash also created digital transaction records that can support formalisation and credit assessment. Research on India’s digital-payment expansion has found links between access to digital payments and greater access to formal credit.
That success leaves a financing question. Banks and payment providers must maintain capacity, prevent fraud, resolve disputes and keep their systems resilient as transaction volumes grow. These costs cannot be wished away. Public funding and cross-subsidies have supported the expansion of UPI, but policymakers must establish whether the existing arrangements can finance the system over the long term. A charge on some merchant transactions is one possible response. Its justification depends on how it is designed and who ultimately bears it.
The transaction threshold conceals the distribution of costs
Under the proposed framework, person-to-person transfers remain free, while merchant transactions up to ₹2,000 are exempt from MDR. Eligible small merchants receiving up to ₹1 lakh a month through UPI QR codes are also protected. Specified person-to-merchant transactions above ₹2,000 attract a standard MDR of 0.4%, subject to a cap of ₹300, while designated sectors receive preferential treatment. The government has said that about 96% of merchant transactions by volume would remain unaffected. A fund equivalent to 5% of MDR collections is intended to support UPI adoption among small merchants.
These exemptions protect many routine transactions. Yet transaction counts alone provide an incomplete picture of the policy’s reach. Payments above ₹2,000 reportedly account for about 4% of person-to-merchant transactions but roughly 67% of their value. The vast majority of transactions may therefore remain outside the charge even as a substantial share of the money moving through the system becomes liable for MDR.
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The effect on an individual business depends on its margins. Consider a dealer selling a refrigerator for ₹40,000 with a gross margin of 5%. The gross margin is ₹2,000. An MDR of 0.4% would cost ₹160, equivalent to 8% of that margin before other operating expenses. The charge is small relative to the selling price, but less so relative to the amount the dealer earns on the sale. Electronics retailers, wholesalers, jewellers and other businesses dealing in high-value goods may face similar pressures, particularly where margins are narrow.
The monthly-receipts threshold for protected small merchants raises a separate question. A payment-system category based on UPI receipts does not necessarily correspond to the government’s classification of a micro-enterprise. Under the revised MSME classification effective from April 2025, a micro-enterprise can have annual turnover of up to ₹5 crore, subject to the applicable investment criterion. A business may qualify as a micro-enterprise under that framework but fail to qualify for the payment system’s small-merchant protection once its monthly UPI receipts exceed the prescribed limit. The two categories serve different purposes, but the resulting gap deserves scrutiny.
The ₹2,000 transaction threshold may also influence payment choices. A payment just below the threshold is exempt, while one just above it may attract MDR. Merchants could absorb the charge, adjust discounts or encourage customers to use another payment method. Some might prefer cash or split transactions, although the extent of such responses cannot be known in advance. Their incidence should be measured rather than assumed. A financing arrangement that discourages merchants from accepting digital payments could erode some of the gains that UPI has delivered.
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UPI MDR charges: Measure the cost against the public benefit
The policy debate should move beyond the simple opposition between free UPI and paid UPI. A payment network needs dependable financing, but the price structure should reflect the diversity of merchants and the public benefits created by widespread digital adoption.
A six-month regulatory impact assessment would provide a useful starting point. It should examine changes in payment behaviour, merchant costs and cash use across business sizes, sectors, regions and transaction values. The assessment should distinguish the effect of MDR from other factors influencing payment choices, particularly during periods of unusually high retail activity.
The eligibility rules for small-merchant protection should also be tested against verifiable indicators such as Udyam registration, turnover and business activity. Monthly UPI receipts may be convenient to administer, but they are an incomplete measure of a firm’s financial capacity. Any revised classification would need safeguards against misuse while ensuring that businesses with limited ability to absorb charges are not excluded simply because they process a few large transactions.
The distribution of MDR revenue deserves comparable scrutiny. Banks and other payment-system participants should be able to demonstrate how the charge supports the services required to process payments. Evaluation should include system uptime, failed transactions, settlement performance, fraud resolution and grievance redress. These indicators would help establish whether merchants are paying for improvements in the service they receive and whether the revenue is reaching the parts of the ecosystem that bear the costs.
The proposed small-merchant fund should be judged by measurable outcomes, including whether it brings new merchants onto UPI and helps smaller businesses continue accepting digital payments. Periodic comparisons between MDR collections and audited ecosystem costs would also help regulators determine whether the rates and exemptions remain appropriate as the network expands.
UPI’s success has depended in part on making digital payments inexpensive and easy to accept. Introducing a charge on selected transactions need not undermine that achievement, but the consequences will depend on the details of the framework and its implementation. The Supreme Court’s decision not to grant an interim stay does not settle the legal challenge or establish that the pricing structure is economically optimal. The government must still demonstrate that the arrangement can finance a reliable payment network without placing a disproportionate burden on merchants whose margins are already thin.
Mehta is Secretary General of CUTS International, a 40+ year old public policy think tank. Banerjee is associated with the Jaipuria Institute of Management, and Sengupta is a Senior Research Associate at CUTS International.