UPI MDR: UPI processed 23.66 billion transactions worth ₹29.88 lakh crore in July 2026. It accounted for about 85 per cent of India’s digital payments in 2025-26. A payment rail used for groceries, taxis and hospital bills has become part of the country’s everyday economic infrastructure. Its success now poses a question that the government postponed during the years of rapid adoption: who should pay to keep it running?
The Taxation and Other Laws (Amendment) Bill, 2026, introduced in the Lok Sabha on August 4, changes Section 10A of the Payment and Settlement Systems Act, 2007. The present provision bars banks and system providers from charging users of electronic payment modes prescribed under the Income-tax Act. The Bill would allow the Centre to notify one or more modes that must remain free. It does not impose a UPI service fee or restore merchant discount rates. It gives the government the legal room to do so selectively later.
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The government is expected to green flag the levy of a MDR of 0.25%-0.4% on UPI transactions above Rs 2,000 made to businesses. However, person to person payments may remain exempted. RBI Governor Sanjay Malhotra said that it is premature to affirm as to how the cost will play out. Most likely, routine purchases such as milk, vegetables, groceries or small payments like autos, taxis etc will be spared thanks to Rs 2000 ceiling.
UPI MDR and the cost of zero pricing
Zero MDR helped UPI spread. A kirana store or street vendor could accept a QR payment without surrendering a share of the sale. That mattered when the government was trying to displace cash and create a national acceptance network. The policy achieved its purpose. UPI now handles transactions at a scale that no commercial payment system can treat as a promotional expense.
The payment may appear free to the merchant and customer, but banks, acquiring institutions, app providers and payment aggregators still pay for switching, fraud control, cybersecurity, dispute resolution and merchant support. NPCI’s central infrastructure is only one layer of this cost. The banks and apps that connect customers and merchants to the rail carry much of the operating burden.
The Centre has therefore substituted budget support for transaction revenue. The 2026-27 Budget provides ₹2,000 crore for incentives on RuPay debit card and low-value BHIM-UPI merchant transactions. The allocation is lower than the revised estimate of ₹2,196 crore for 2025-26. It is also an annual fiscal decision, while transaction volumes continue to rise. Banks and payment firms cannot plan investment in capacity and security on the assumption that every Budget will reimburse them adequately.
The incentive covers specified low-value merchant payments and RuPay debit transactions, rather than the full cost of all UPI traffic. Its size and terms remain government decisions. A delayed or reduced allocation shifts more of the expense to banks and payment apps without creating a predictable claim on revenue. The zero-price promise is therefore financed through an uncertain mix of subsidy and cross-subsidy.
Large fintech companies have responded by treating payments as a customer-acquisition business. They earn from loans, insurance, wealth products, advertising and merchant services. That model favours firms with capital, distribution and large user bases. Smaller payment providers have fewer products to cross-sell and little direct revenue from the service that brings users to them. Zero MDR therefore protects merchants while reinforcing concentration among payment companies.
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Merchant discount rates need differentiation
A uniform MDR would be a poor correction. Small merchants remain sensitive to even a modest charge. Some would return to cash, ask customers to pay extra or refuse UPI for low-margin sales. The government would then weaken the acceptance network it spent a decade building.
The workable option is differentiated pricing. Low-value transactions and payments to small merchants can remain free, supported by a defined government subsidy. Larger merchants can pay a modest MDR on higher-value transactions, as they already do on card payments. Reuters has reported proposals involving charges on payments above ₹2,000 or merchants above a turnover threshold. Transactions covered by one proposal represent about 4 per cent of volume but 67 per cent of UPI’s value. No rate or eligibility rule has been approved.
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Such a structure would make the subsidy more defensible. Public money would support transactions where zero pricing advances inclusion. Organised retailers and large online businesses would pay for the payment service they use. The charge should remain with the merchant. Allowing payment firms to levy it directly on customers would damage UPI’s simplicity and invite widespread surcharging.
The amendment has begun the legal work without settling the policy. The government must now state which transactions deserve subsidy, which merchants can bear a fee and how the revenue will be divided among banks, app providers, acquirers and NPCI. A differentiated UPI MDR can preserve free everyday payments and restore an investment case for the institutions that process them. Permanent zero pricing would merely leave the bill with the taxpayer.