India is set to phase out subsidies for low-value UPI transactions by 2026, introducing merchant discount rates for higher-value payments to make the system financially self-sustaining and reduce reliance on government support.
India’s government is preparing to phase out subsidies for low-value Unified Payments Interface transactions as the payments system moves closer to generating its own revenue, according to reports in The Economic Times and The New Indian Express. The shift comes as a new merchant discount rate, or MDR, is set to apply to some higher-value UPI merchant payments from 15 October 2026, ending the zero-MDR regime that has been in place since January 2020.
Under the new framework reported by The New Indian Express, a 0.4% MDR will apply to selected merchant UPI payments above ₹2,000, while consumers using UPI for person-to-person transfers will remain unaffected. Small merchants with monthly UPI QR receipts of up to ₹1 lakh are exempt, and the fee is capped at ₹300 for payments of ₹75,000 or more. Mint reported that only about 4% of total UPI transactions are expected to fall within the chargeable category, suggesting the wider impact on usage may be limited.
The policy shift marks a significant change in how the government supports the digital payments network. Since January 2020, UPI and RuPay debit card payments have operated under a zero-MDR model, with the state compensating banks and payment firms for lost fee income. According to The Economic Times, that subsidy has already been shrinking sharply, falling from ₹3,631 crore in fiscal 2024 to ₹1,046 crore in fiscal 2025. The paper also reported that no new subsidy payments have been made since April 2025, even though the government had set aside ₹2,000 crore for fiscal 2027.
Officials and industry sources cited by The Economic Times said the aim is to make the UPI ecosystem financially self-sustaining and reduce reliance on taxpayer funding. The broader argument is that once banks and payments firms can earn transaction-linked revenue from larger merchant payments, there is less need for government support on smaller transactions. Analysts quoted by Mint said the MDR revenue could help fund infrastructure, security and fraud prevention, strengthening the system over time. The move also reflects the original policy goal behind the subsidy programme: to encourage digital payments among small traders and expand secure payment infrastructure in tier-two and tier-three cities, as well as in rural areas. With that adoption now far more widespread, the government appears ready to withdraw support gradually rather than continue underwriting the system indefinitely.
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