India’s flagship digital payment system may soon introduce merchant charges, risking a shake-up in the nation’s seamless transaction landscape amid rising costs and international scrutiny.
India’s Unified Payments Interface has become one of the country’s most powerful pieces of financial infrastructure, but its defining promise of free transactions may be nearing an end. The Lok Sabha’s passage of the Taxation and Other Laws (Amendment) Bill, 2026 on August 6 has created a legal pathway for a Merchant Discount Rate on some UPI payments, reopening a debate that had been dormant for years.
According to the government, any such charge would fall on merchants rather than consumers. Finance minister Nirmala Sitharaman has said the aim is to help banks and fintech companies fund investment in infrastructure, security and product development. Yet Reserve Bank of India governor Sanjay Malhotra suggested a day earlier that users would eventually bear the cost in some form, underlining the tension at the heart of the proposal.
The timing matters because UPI is no longer a fledgling payment option. It has moved from a tool for peer-to-peer transfers to the default way millions of Indians pay for everyday purchases, and transaction volumes continue to climb sharply. Inc42 noted that UPI handled 2,366 crore transactions in July, up from 2,272 crore in June, while transaction value rose to ₹29.88 lakh crore from ₹28.92 lakh crore. The World Economic Forum has previously described UPI as a global leader in real-time payments, pointing to its rapid rise since launch in 2016.
That scale has also made the system expensive to maintain. Payment firms argue that the zero-MDR model, which helped drive mass adoption, now leaves them carrying the cost of processing a huge share of transactions without direct revenue. Industry estimates cited by Inc42 suggest that ₹4,000 crore to ₹5,000 crore a year may be needed just to cover person-to-merchant transactions, while government support schemes have not kept pace with the network’s expansion. The Payments Council of India has argued that sustained investment is essential if the rail is to remain reliable.
The proposed framework appears designed to limit the political and commercial fallout. LiveMint reported that the government is considering a small charge on large merchants while leaving smaller businesses and consumers untouched. Inc42 said the charge could apply only to merchants with annual turnover of about ₹1 crore to ₹1.5 crore or more, and only on UPI transactions above ₹2,000, with a rate in the range of 0.05% to 0.07%. That would keep most low-value payments outside the net, but even a modest fee could alter behaviour if merchants pass it on.
That concern is not theoretical. A LocalCircles survey cited by Inc42 found that 53% of respondents said they would move away from UPI for transactions above ₹3,000 if MDR were introduced for larger merchants. Of those, 27% said they would use credit cards, 14% debit cards and 12% bank transfers or cash. The industry says payment acceptance should remain a business cost, but regulators will need to be clear that the charge cannot reappear as an obvious surcharge at checkout.
The debate also has an international angle. Inc42 reported that the US Trade Representative flagged India’s zero-MDR regime in its March 2026 foreign trade barriers report, arguing that it could disadvantage fee-based rivals such as Visa and Mastercard. Still, the Indian government has framed the move as a domestic sustainability measure rather than a response to foreign pressure.
If MDR is introduced, the biggest winners may be banks and payment aggregators rather than the consumer-facing apps that dominate UPI usage. PhonePe, Google Pay, Paytm, Amazon Pay and others already monetise parts of the payments stack and may not see an immediate transformation in their own models. The larger question is whether India can keep the system affordable and frictionless while finding a durable way to pay for the infrastructure behind it.
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