UPI to remain free for users; nominal MDR may apply to select merchant transactions

Consumers will not face any charges for UPI payments. Most merchant transactions will also remain free of cost. Any future charges will apply to limited merchant transactions above a threshold. This move aims to ensure UPI's long-term sustainability and technological advancement. The government stated UPI will remain free for citizens.

8 Aug 20262 min readRead original on Economic Times

Prelims: Economy, Science & TechnologyMains: GS 3

Context

The Union government has clarified that the Unified Payments Interface () will remain free for all Person-to-Person transactions and the vast majority of merchant transactions. The government has proposed an amendment to the to potentially introduce a nominal Merchant Discount Rate (MDR) on select, high-value merchant transactions, aiming to make the rapidly growing digital payment ecosystem self-sustaining and resilient.

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Economic

The introduction of a Merchant Discount Rate (MDR) (the fee a merchant pays to a bank for processing digital payments) on UPI highlights a critical shift towards a self-sustaining revenue model for digital public infrastructure. Currently, the zero-MDR regime, mandated since January 2020, relies heavily on government subsidies to compensate banks and the National Payments Corporation of India (NPCI) for operational costs. However, with UPI processing over 2,300 crore transactions monthly, the sheer volume necessitates continuous investment in infrastructure, cybersecurity, and fraud prevention. A nominal, threshold-based MDR on select merchant transactions aims to generate necessary revenue without burdening the average consumer or small retailer, thereby ensuring long-term technological advancement and resilience against emerging risks.

Governance

The proposed amendment to Section 10A of the Payment and Settlement Systems Act, 2007 via the proposed Taxation and Other Laws (Amendment) Bill, 2026 demonstrates the government's approach to adaptive regulation. The amendment serves as an enabling provision, delegating the specific decision-making authority regarding the MDR to the 'UPI and Services Steering Committee' headed by NPCI. This allows for a flexible, responsive regulatory framework rather than rigid statutory pricing. By delegating this power, the government ensures that the MDR, if implemented, can be adjusted based on market realities, technological needs, and stakeholder feedback, balancing the need for financial sustainability with the goal of promoting financial inclusion.

Technological

The exponential growth of UPI and its expansion into international markets present substantial technological challenges. A zero-revenue model makes it difficult for service providers to justify significant investments required for upgrading cybersecurity and managing the massive data loads associated with billions of transactions. Introducing a revenue stream through MDR is seen as essential to incentivize continuous innovation and the development of robust infrastructure. A financially viable ecosystem is also necessary to encourage more companies to enter the market, fostering competition and further driving technological advancements in India's digital payment landscape.

Key references

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