Legislative changes in India set the stage for introducing merchant transaction fees on UPI systems, sparking debate on financial sustainability and inclusion.
India’s debate over charging merchants for some UPI payments has shifted from rumour to legislation, but not yet to a final tariff. After Parliament passed the Taxation and Other Laws (Amendment) Bill, 2026 on 10 August 2026, Finance Minister Nirmala Sitharaman said consumers would continue to use the payments system free of charge and that smaller businesses would stay protected, stressing in Parliament that “The enabling provision that we are bringing in today does not impose any tax or transaction charge on UPI users.” She also said no merchant discount rate, or MDR, framework had yet been settled, meaning the government has created the legal room for a fee without actually announcing one.
That distinction matters because UPI is no longer a niche product needing a temporary policy push. Reuters reported that the network handled 23.6 billion transactions worth 29.9 trillion rupees in July 2026 alone, while Mint said a parliamentary finance committee found UPI now accounts for about 88 per cent of all digital transactions in India. The system has operated under a zero-MDR regime since 2020, helping it become the country’s default way to pay, but also leaving banks, payment firms and infrastructure providers without a direct merchant revenue stream on most transactions.
The Reserve Bank of India has publicly underlined that this is now a question of sustainability rather than whether consumers should suddenly face a checkout fee. Business Standard reported RBI Governor Sanjay Malhotra saying: “The costs have to be paid by someone.” He added that the burden is already carried somewhere in the wider economy, even if users do not see it as an explicit charge. The Tribune said Malhotra described discussion of the final structure as “very premature”, but he also pointed to the continuing expense of strengthening payments infrastructure, fraud controls and resilience as volumes keep climbing.
The legal change itself is narrower than some of the public reaction suggested. Moneycontrol reported that Section 10A of the Payment and Settlement Systems Act currently prevents banks and payment-system providers from charging for electronic payment modes covered by the Income-tax Act linkage, and that the amendment removes that connection. The Tribune said the revised framework would allow the government to decide, through notification, which electronic payment modes should continue to enjoy statutory protection from charges. Crucially, the Bill does not itself set a UPI fee, write in a Rs 2,000 threshold or specify which merchants would be covered.
What officials and industry executives are discussing, however, is becoming clearer. Reuters said policymakers are weighing two broad approaches: a threshold-based levy or one linked to merchant turnover. One option under consideration would apply an MDR of 0.3 per cent to 0.5 per cent on transactions above Rs 2,000 for merchants with annual turnover above Rs 15 million. Business Standard, citing the same policy debate a day later, put the likely range a little lower at 0.25 per cent to 0.4 per cent for business payments above Rs 2,000, while person-to-person transfers would remain free. Either way, the fee being discussed is well below the roughly 1.5 per cent commonly charged on credit cards and the rates levied on many debit-card payments.
The attraction of that model for policymakers is obvious. Reuters, citing Jefferies, said transactions above Rs 2,000 account for only 4 per cent of merchant-payment volumes but about 67 per cent of transaction value. That means a narrowly targeted MDR could raise meaningful revenue without touching most everyday scans at neighbourhood shops. The same estimate suggested such a move could create a revenue pool of Rs 50 billion to Rs 100 billion for the payments industry. Reuters also noted that UPI usage is dominated by Walmart-backed PhonePe and Alphabet’s Google Pay, underscoring how large the commercial ecosystem around the rails has become.
For online commerce, though, even a limited levy could quickly turn into a margin story. Moneycontrol reported that internet companies and marketplace sellers are bracing for higher payment-acceptance costs if UPI charges are applied to higher-value purchases. The problem is not only the rate but also who counts as the merchant: a marketplace platform collecting funds first may be treated differently from an individual seller paid directly. Prashanth Ramdas of Khaitan & Co told Moneycontrol regulators should take “a functional approach to defining a merchant”, while the same report said quick-commerce and food-delivery groups might be less exposed if the levy is confined to larger ticket sizes. Smaller marketplace sellers, by contrast, would have to absorb yet another cost on top of commissions, logistics and advertising.
That leaves the government trying to protect UPI’s political appeal while finding a way to fund its scale. Mint reported that the Payments Council of India, a 180-member industry body, warned in March 2025 of “pressing financial sustainability concerns”, arguing that the government’s Rs 1,500 crore incentive support covered only a fraction of the estimated Rs 10,000 crore annual cost of maintaining and expanding the system. The group proposed a 0.3 per cent MDR for UPI only on large merchants. Sitharaman, meanwhile, has kept emphasising that small merchants remain central to UPI’s inclusive growth. The UPI provision was carried through Parliament inside a wider tax-and-investment Bill that also included measures on data-centre services, electronics manufacturing, diamond trading and investment funds, a sign that ministers see the payment-fee question as part of a broader industrial and financial-policy reset rather than a standalone charge on shoppers.
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