The Indian government’s move to potentially levy charges on high-value UPI transactions has shifted the policy debate from theory to action, raising questions over who should bear the costs of the country’s dominant digital payments infrastructure.
India’s debate over whether to charge for some UPI transactions has moved from theory to policy, after a proposed change to the Payment and Settlement Systems Act reopened questions about who should bear the cost of running the country’s most widely used digital payments network. According to the material published by Legacy IAS, the move would allow the government to notify categories of transactions on which charges may be levied, reviving a long-running argument over whether those costs should fall on the state, banks, payment firms, merchants or users.
UPI, launched in April 2016, has become central to India’s retail payments system. Legacy IAS says it now handles more than 18,000 crore transactions a year, far more than other digital payment modes combined. The system was built by the National Payments Corporation of India, a not-for-profit body backed by the Reserve Bank of India and the Indian Banks’ Association. Alongside UPI, RuPay has emerged as a domestic card network designed to compete with Visa and Mastercard, while the Payment and Settlement Systems Act remains the main law governing the sector.
The zero-fee model dates to January 2020, when the government waived merchant discount rate, or MDR, on UPI and RuPay debit card payments to encourage adoption. Terra Insight notes that the legal framework for that regime sits in Section 10A of the Payment and Settlement Systems Act and Section 269SU of the Income-tax Act. But the removal of MDR also shifted operating costs onto banks, payment processors and the public purse. A merchant subsidy scheme introduced in 2021 has already cost ₹11,349 crore, and the 2026-27 Budget set aside another ₹2,000 crore to support low-value UPI and RuPay debit transactions, Business Standard reported.
The latest proposal, as described by Legacy IAS and other reports, would initially apply only to UPI payments above ₹2,000 made to merchants with annual turnover above about ₹1 crore to ₹1.5 crore. That would capture only a small share of transactions, but the law would give the government scope to widen the chargeable categories later. Some industry reports say any fee would likely stay below 0.5%, with a decision expected within a month. Even if limited at first, economists warn that merchants in competitive retail markets could pass the cost on to consumers through higher prices or surcharges.
The issue has broader policy implications. If the government wants UPI to remain effectively free for small users and merchants, one option is to fund more of the system through the Reserve Bank of India’s surplus transfers, which reached a record ₹2.69 lakh crore in 2024-25, according to the material cited by Legacy IAS. Another is a tiered MDR structure that leaves small transactions untouched but allows modest charges on large-value, high-volume payments. Industry observers also point to cross-subsidy from credit-linked products such as UPI credit on RuPay cards and buy-now-pay-later services. At the heart of the debate is a simple question: if UPI has become essential public infrastructure, should its cost be borne by users, the financial system or the state?
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