Govt Clarifies UPI Will Stay Free for Users; Limited MDR on Large Merchants Under Consideration

Quick Summary

The Finance Ministry has issued a formal clarification: person-to-person (P2P) UPI transactions will continue to be free for consumers, and there will be no blanket Merchant Discount Rate (MDR) imposed across UPI. However, the government has left the door open for a narrowly scoped MDR that would apply only to a limited set of merchant transactions above a certain threshold — and only at a nominal rate, well below what banks currently charge on card payments. No such MDR has been implemented yet; it remains a possibility tied to an enabling legal provision, not an announced policy.

This distinction — consumers stay protected, a future merchant-side fee remains on the table for a specific segment — sits at the center of a debate that affects nearly 30 crore UPI transactions processed every day across India.

What the Government Actually Clarified

The clarification came in response to public confusion following an amendment tucked into the Taxation and Other Laws (Amendment) Bill, 2026, which modifies the Payment and Settlement Systems Act, 2007. Once concerns emerged that this amendment could open the door to charges on ordinary UPI users, the Finance Ministry moved to address the confusion directly.

The government's position, as stated by the Finance Ministry, breaks down into three parts:

1. All P2P UPI transactions remain free. Sending money to another individual through UPI will not attract any charge, now or as a result of this amendment.
2. There is no blanket MDR on merchants. The amendment does not automatically impose a fee on all UPI payments made to businesses.
3. A limited MDR is possible for select merchant transactions. If introduced, MDR charges would apply only to a limited set of merchant transactions above a certain threshold and at a nominal rate, according to the ministry, and any such charges would be significantly lower than the MDR applicable to debit or credit card transactions.

Crucially, the government described the legislative amendment itself as an enabling provision — meaning it creates the legal architecture that would allow a future MDR framework to be designed, not a decision that one has been finalized. According to the ministry, the intent is to support the long-term sustainability, technological development and resilience of the UPI ecosystem, rather than to generate near-term revenue. Officials have also rejected reports suggesting that external influences were driving the policy changes, describing such claims as unfounded and misleading.

Importantly, the ministry indicated that the mechanics of any future charge would not be decided by the government directly. Once Parliament passes the Bill, the 'UPI and Services Steering Committee,' headed by the National Payments Corporation of India (NPCI), will decide on the MDR, if any, the government said — placing the actual design of any fee structure in the hands of the payments regulator's own governing body rather than the Finance Ministry itself.

What Is MDR, and How Does It Work?

Merchant Discount Rate (MDR) is the fee a merchant pays their bank (or payment aggregator) for the ability to accept a digital payment. Historically, whenever a customer swipes a credit or debit card, the merchant's bank deducts a small percentage of the transaction value before settling the rest to the merchant. That fee is then split between several parties in the payment chain: the merchant's bank (acquirer), the customer's bank (issuer), the card network, and often a payment gateway or aggregator.

For a customer, the transaction feels free because the merchant absorbs the cost — the fee is baked into how businesses price their goods and services, rather than charged directly to the shopper at checkout.

Under RBI guidelines, MDR up to 0.90% of transaction value is applicable across all card networks for debit cards, and MDR on credit cards has historically run even higher, often around 1-2% depending on the card type and merchant category. Before UPI's rules changed in 2020, merchants used to pay an MDR fee amounting to 1 per cent of the total transaction value on card payments.

Why UPI Currently Has No MDR

Since January 2020, the government has mandated a Zero MDR policy for UPI person-to-merchant (P2M) transactions. This was a deliberate policy choice, not a market outcome — the government waived MDR specifically to accelerate the shift from cash and card payments to UPI, removing cost as a barrier for merchants of every size to accept digital payments.

Prior to that change, the National Payments Corporation of India (NPCI) had permitted MDR of up to 0.30% of transaction value for UPI P2M transactions — roughly a third of the rate charged on debit cards. Since 2020, that entire fee has been set to zero across the board, regardless of merchant size or transaction value.

The Economics: Who Bears the Cost of "Free" UPI?

Zero MDR does not mean UPI transactions are free to process — it means the government has decided who doesn't have to pay for them. The infrastructure behind every UPI transaction — servers, real-time settlement rails, fraud detection, cybersecurity monitoring, and customer support — still costs money to run, and that cost is borne by banks, Payment Service Provider (PSP) banks, and Third-Party App Providers (TPAPs) like the fintech apps consumers use daily.

Banks and fintech companies have argued for some time that UPI requires a sustainable revenue model, since they receive almost no direct income from processing the vast majority of UPI payments despite bearing the operational load. This has been a persistent industry grievance, and reports indicate that a Parliamentary Committee also recommended restoring MDR for large merchants as one way to address it.

To partially offset this gap, the government has run a separate compensation mechanism: a direct incentive scheme rather than a merchant fee. Under this scheme, the government pays an incentive directly to the acquiring bank, which is then shared among other stakeholders — the issuer bank, the payment service provider bank, and the app providers — but only for small-value transactions. For the 2024-25 financial year, this incentive scheme carried an estimated outlay of ₹1,500 crore, running from April 1, 2024 to March 31, 2025, and covering P2M UPI transactions up to ₹2,000 for small merchants, with an incentive rate of 0.15% on qualifying transactions. For FY 2026-27, the Union Budget allocated ₹2,000 crore for RuPay and UPI P2M incentives — an amount industry body Payments Council of India has publicly said falls well short of what is needed, with its chairman arguing that servicing roughly 30 crore free transactions a day would strain the ecosystem's ability to fund scaling and growth without a larger allocation.

In short: government subsidies currently plug some of the revenue gap for small-merchant transactions, but large merchants processing high transaction volumes receive no such offset — which is precisely the segment now under discussion for a possible future MDR.

Why Large Merchants Could Be Treated Differently

The economic logic for treating large and small merchants differently rests on two pillars:

• Protecting small businesses and financial inclusion. Small merchants — street vendors, kirana stores, and neighborhood shops — were a central target of UPI's original zero-cost push. Charging them MDR could push some back toward cash, undermining years of digital-payment adoption at the grassroots level.
• Large merchants can better absorb marginal costs. Big retail chains, e-commerce platforms, and high-volume businesses process significantly larger transaction values and have the scale to absorb a small, nominal fee without materially affecting their margins or needing to pass it on to shoppers.

According to reports on the proposal still under discussion, MDR may apply only to large merchants with an annual turnover of around ₹1 crore to ₹1.5 crore or more, with a proposed fee of between 5 and 7 basis points — roughly 0.05% to 0.07%. That would be a fraction of the pre-2020 UPI MDR of 0.30%, and dramatically lower than the sub-1% MDR still charged on debit cards. It bears repeating: this remains a proposal, and no final decision has been announced. Separately, reports on the current discussion suggest both P2P transfers and UPI payments to small merchants are expected to stay outside any MDR framework.

What This Means

• For consumers: Nothing changes right now, and the government has been explicit that ordinary UPI use — sending money to friends and family, and paying small merchants — will not attract new charges. Even in the scenario where a large-merchant MDR is eventually introduced, it is structured as a merchant-side cost, similar to how card MDR already works today without being passed on as a line-item charge to the shopper.
• For small businesses: The zero-MDR regime and the small-merchant incentive scheme are both expected to remain intact, preserving the cost advantage that made UPI attractive to small vendors in the first place.
• For large merchants: They may eventually face a modest, capped fee — far below existing card MDR — if the government and NPCI's steering committee decide to activate the enabling provision. Until then, large merchants also continue to enjoy zero MDR on UPI.
• For banks, PSPs, and fintechs: A limited MDR on high-volume large-merchant transactions, even at 5-7 basis points, would represent a meaningful new revenue stream after more than five years of operating a high-volume, near-zero-revenue product. It would not fully replace the economics of the old card-based system, but it would ease some of the sustainability pressure that industry bodies have flagged repeatedly.
• For payment platforms (NPCI, PSPs, TPAPs): The steering committee structure gives the ecosystem's own regulator-linked body — rather than the Finance Ministry — a formal role in shaping any eventual fee structure, suggesting the government wants the design process to be technical and consultative rather than purely a fiscal decision.

UPI vs. Card MDR: The Core Difference

Card-payment economics were built around a for-profit fee model from the outset — networks like Visa and Mastercard, along with issuing and acquiring banks, have always earned a share of every transaction through MDR, which is why cards can carry MDR near 1% or higher. UPI was designed the opposite way: a public-utility-style rail, kept deliberately fee-free to maximize adoption, with the government backstopping some of the cost through direct subsidies rather than letting banks recover costs from merchants transaction-by-transaction.

A future large-merchant MDR, even if implemented, would not resemble a return to card-style economics. At the proposed 5-7 basis points, it would sit at roughly one-fifth of the old pre-2020 UPI MDR and a small fraction of current card MDR — a calibrated tweak rather than a structural reversal.

Would a Future MDR Automatically Mean Higher Costs for Consumers?

Not necessarily. MDR is a merchant-side cost, and there is no requirement — legal or otherwise — that a merchant must pass it on directly to a consumer as a checkout fee, just as merchants generally do not itemize card MDR as a separate charge to shoppers today. Whether or in what form the cost of a future large-merchant MDR filters into consumer pricing would depend on individual merchant decisions and competitive pressure within specific sectors, not on the MDR policy itself.

UPI's Scale and India's Digital-Payments Strategy

The scale of what's at stake is significant. UPI processed 2,366 crore transactions worth ₹29.9 lakh crore in July 2026 alone, according to the Finance Ministry — figures that underline why even a small percentage-point change in the fee structure carries outsized implications for banks and fintechs operating at that volume. UPI transaction value has grown dramatically over recent years, from ₹21.3 lakh crore in FY 2019-20 to over ₹213.8 lakh crore by January 2025, with person-to-merchant transactions alone reaching ₹59.3 lakh crore in that period.

UPI's ambitions now extend well beyond India's borders. The payment system is currently live in 11 foreign countries, while several other countries have expressed interest in adopting the technology — positioning UPI as a flagship of India's broader digital public infrastructure export strategy, alongside platforms like Aadhaar and DigiLocker.

What Has Been Confirmed vs. What Remains a Proposal

To be precise about the current state of play:

Officially confirmed by the Finance Ministry:

• P2P UPI transactions will remain free.
• There is no blanket MDR being imposed on merchants.
• The Payment and Settlement Systems Act amendment is an enabling legal provision, not an active MDR order.
• Any future MDR, if introduced, would be limited to select merchant transactions above a threshold, at a nominal rate lower than card MDR.
• The NPCI-headed UPI and Services Steering Committee would decide on the specifics, if and when Parliament passes the relevant Bill.

Reported as under discussion or proposed, not yet confirmed:

• A turnover threshold of roughly ₹1 crore to ₹1.5 crore for merchants who might be subject to MDR.
• A proposed fee range of 5-7 basis points (0.05%-0.07%).
• A Parliamentary Committee recommendation favoring restored MDR for large merchants.

Not confirmed, and should not be treated as fact:

• Any specific implementation date for a large-merchant MDR.
• Any final fee percentage or exact merchant threshold.
• Any suggestion that consumers will be charged directly for UPI transactions.

FAQ

1. Is UPI currently free for consumers? Yes. Sending or receiving money via UPI, whether to another person or to a merchant, currently carries no charge to the consumer, and the government has reaffirmed this will continue.

2. What is MDR? Merchant Discount Rate is the fee a merchant pays their bank or payment provider for accepting a digital payment, typically expressed as a percentage of the transaction value and shared among the banks and platforms involved in processing it.

3. Do merchants currently pay MDR on normal UPI transactions? No. Since January 2020, UPI has operated under a Zero MDR policy for merchant transactions of all sizes.

4. Could large merchants face MDR in the future? Possibly. The government has said a limited MDR on select merchant transactions above a certain threshold is under consideration, but this has not been finalized or implemented, and would require further regulatory steps, including a decision by NPCI's steering committee.

5. Would a future MDR automatically mean customers pay more? Not automatically. MDR is charged to merchants, not consumers, and merchants are not required to pass the cost on as a direct checkout fee.

6. Why does the government support zero-cost UPI? To maximize adoption of digital payments across all merchant sizes, particularly among small businesses, and to reduce dependence on cash — a policy goal the government has continued to support through direct incentive schemes even as banks and fintechs push for a more sustainable long-term revenue model.

What to Watch Next

The near-term signal to track is the passage of the Taxation and Other Laws (Amendment) Bill, 2026, through Parliament, since the enabling provision only becomes operative once the Bill clears both houses. After that, attention will shift to the NPCI-led UPI and Services Steering Committee, which the government says will determine whether an MDR is introduced at all, and if so, at what threshold and rate. Industry voices — particularly the Payments Council of India and major banks — are likely to continue pushing for a more robust revenue model, while consumer advocacy groups and small-merchant associations will be watching closely to ensure the line between "free P2P and small-merchant UPI" and "possible large-merchant MDR" doesn't blur in practice. Until the committee acts, the current zero-MDR status quo remains fully in effect for every UPI user and merchant in India.

Further reading and useful links

• How UPI Became the World's Largest Real-Time Payments System
• Explained: The Payment and Settlement Systems Act Amendment and What It Changes
• Card Payments vs. UPI: Comparing India's Digital Payment Cost Structures

Reader questions

Frequently asked questions

Is UPI currently free for consumers?

Yes. Sending or receiving money via UPI, whether to another person or to a merchant, currently carries no charge to the consumer, and the government has reaffirmed this will continue.

What is MDR?

Merchant Discount Rate is the fee a merchant pays their bank or payment provider for accepting a digital payment, typically expressed as a percentage of the transaction value and shared among the banks and platforms involved in processing it.

Do merchants currently pay MDR on normal UPI transactions?

No. Since January 2020, UPI has operated under a Zero MDR policy for merchant transactions of all sizes.

Could large merchants face MDR in the future?

Possibly. The government has said a limited MDR on select merchant transactions above a certain threshold is under consideration, but this has not been finalized or implemented, and would require further regulatory steps, including a decision by NPCI's steering committee.

Would a future MDR automatically mean customers pay more?

Not automatically. MDR is charged to merchants, not consumers, and merchants are not required to pass the cost on as a direct checkout fee.

Why does the government support zero-cost UPI?

To maximize adoption of digital payments across all merchant sizes, particularly among small businesses, and to reduce dependence on cash — a policy goal the government has continued to support through direct incentive schemes even as banks and fintechs push for a more sustainable long-term revenue model.

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