India’s government has opened the door to bringing merchant fees back to Unified Payments Interface transactions, potentially ending a six-year experiment in which the country’s dominant digital-payment rail was effectively free for both consumers and merchants.
The change does not mean ordinary UPI users are being charged. The government has repeatedly said person-to-person payments will remain free and that any Merchant Discount Rate, or MDR, would formally be paid by qualifying merchants.
But the economic distinction becomes less clear if businesses pass that cost back to customers.
A leading proposal would impose MDR of roughly 0.3% to 0.5% on transactions above ₹2,000 at merchants generating more than ₹1.5 crore in annual revenue. The final threshold and rate have not yet been decided.
Those transactions represent only around 4% of UPI transaction volume but approximately 67% of value, according to estimates cited by Reuters.
Why India Is Reconsidering Free UPI
The scale of UPI has made its economics increasingly difficult to ignore. The network processed 23.6 billion transactions worth ₹29.87 trillion, approximately $313 billion, in July 2026 alone. Walmart-backed PhonePe and Alphabet’s Google Pay dominate the market.
Since January 2020, however, merchants have generally paid zero MDR for standard UPI transactions.
Instead, taxpayers have indirectly helped fund the ecosystem. The government provided approximately ₹8,730 crore in incentives between fiscal 2021-22 and 2024-25 to support UPI and RuPay payment participants. That model becomes increasingly expensive as transaction volumes grow.
Jefferies estimates that introducing fees on selected large transactions could generate approximately ₹5,000 crore to ₹10,000 crore annually for the payments ecosystem, providing banks and fintech companies with revenue to fund infrastructure, cybersecurity and further expansion.
For payment companies, that would begin correcting a fundamental problem: UPI has generated enormous transaction volume without generating corresponding payment-processing revenue.
The Risk Is Merchants Passing the Fee On
The political challenge is ensuring a merchant fee does not quietly become a consumer fee. There are already anecdotal reports of some local businesses asking customers to pay additional amounts when using UPI following the recent legislative changes, even though a nationwide MDR regime has not yet taken effect.
That creates a straightforward incentive for customers. If a ₹10,000 purchase costs exactly ₹10,000 in cash but ₹10,030 or ₹10,050 through UPI because a merchant passes along a 0.3%-0.5% processing cost, cash suddenly becomes cheaper.
The government is trying to minimize that risk by focusing on larger merchants and higher-value transactions. Finance Minister Nirmala Sitharaman has said small traders such as vegetable sellers, tea vendors and hawkers would remain outside the proposed MDR framework.
The debate therefore is not really about whether UPI should remain free. Someone already pays for the infrastructure required to process tens of billions of transactions every month. For six years, India largely chose government incentives rather than direct merchant fees.
The question now is whether the system can shift some of that cost toward large businesses without allowing those businesses to shift it again toward consumers.
If that boundary holds, UPI can gain a more sustainable business model without changing everyday payment behavior.
If it does not, India could discover that even a fraction-of-a-percent charge is enough to make some consumers reconsider the payment method the country spent years persuading them to adopt.
