India’s hugely popular Unified Payments Interface (UPI) is at the centre of a heated debate after the Lok Sabha passed a bill that opens the door for merchant charges on some digital payments, including UPI. While headlines about “charges on UPI” triggered public anxiety, the government has moved quickly to clarify that ordinary users and peer‑to‑peer (P2P) transfers will remain free, and that only a small slice of high‑value merchant transactions may see a nominal Merchant Discount Rate (MDR) in future.
What the New UPI Charges Law Actually Does
The change comes via the Taxation and Other Laws (Amendment) Bill, 2026, which amends Section 10A of the Payment and Settlement Systems Act, 2007. Until now, Section 10A barred banks and payment system providers from imposing any charges on electronic payment modes prescribed under Section 269SU of the Income Tax Act, a list that includes RuPay debit cards and BHIM‑UPI QR‑based payments.
The amendment replaces that fixed reference with broader language, allowing the central government, by notification, to specify one or more electronic payment modes on which charges can be levied. In practical terms, this is an “enabling provision”: it does not itself impose MDR, but it removes the legal prohibition that previously prevented banks and payment service providers from charging merchants on notified electronic payment modes.
Real‑time bank transfers through RTGS and NEFT already carry service charges, whereas UPI transactions have so far been explicitly exempt from such fees. The new law puts UPI and similar systems into a framework where MDR can be notified selectively, subject to detailed rules that the government has yet to issue.
Government Clarifies: No UPI Charges for Users, P2P Remain Free
Facing widespread concern, the Ministry of Finance and government sources have repeatedly stressed that UPI will continue to be free for users and that all person‑to‑person (P2P) transactions will remain charge‑free. In a press note and subsequent briefings, the government said:
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Ordinary users will not be charged for making UPI payments.
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All P2P transfers—sending money to family, friends or other individuals—will stay free.
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Any MDR, if introduced, would apply only to a limited category of merchant transactions above a specified threshold, and at a nominal rate significantly lower than typical debit and credit card MDR.
Industry commentary suggests the government may allow banks and payment service providers to levy an MDR of around 0.25% to 0.4% on merchant UPI payments above ₹2,000, particularly when made to larger businesses, though no final notification has been issued. PhonePe CEO Sameer Nigam has similarly stated that “UPI is and will remain free for all Indian consumers,” emphasising that any proposed MDR would be a merchant‑side commercial fee, not a customer charge.
Which UPI Transactions Could See MDR?
Government and media reports indicate that any future MDR would be narrowly targeted:
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Charges would apply only to merchant payments above a certain ticket size, for example ₹2,000+, and to large merchants with turnover above ₹1–1.5 crore.
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This design would limit MDR to roughly 5% of all UPI transactions, as most UPI payments are low‑value purchases or P2P transfers.
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Everyday payments for milk, vegetables, groceries, auto‑rickshaws and taxis are not expected to be affected.
NiftyTrader’s analysis breaks the impact down as follows:
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All P2P UPI payments: free for users, no MDR.
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Merchant payments below ₹2,000: free for users, exempt for merchants.
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Selected business‑directed UPI payments above ₹2,000: free for users, MDR of 0.25%–0.4% paid by the merchant to banks and payment service providers.
The UPI and Services Steering Committee, chaired by NPCI and referenced in government communication, would decide the precise MDR structure and thresholds only after Parliament fully passes the Taxation and Other Laws (Amendment) Bill.
Why Is MDR Being Considered for Digital Payments?
The government and the Reserve Bank of India (RBI) argue that India is entering a new phase of digital payments growth that requires the UPI ecosystem to become financially self‑sustaining, rather than relying indefinitely on government subsidies and cross‑subsidisation.
UPI handled 2,366 crore transactions worth ₹29.9 lakh crore in July 2026, making it the world’s largest real‑time payment system, now operational in 11 countries with more interested in adopting it. Maintaining and expanding this infrastructure demands continuous investment in cybersecurity, fraud prevention, server capacity and rural/semi‑urban outreach, which the government says cannot be funded forever purely out of taxpayer money.
RBI Governor Sanjay Malhotra has underlined that “someone will have to pay the cost” of UPI transactions. He framed the policy choice as a trade‑off:
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Either the general public pays via taxes, with the state covering infrastructure costs; or
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The system moves towards a “user‑pays” model, where merchants are charged MDR on certain transactions.
Editorials in The Hindu BusinessLine and other outlets have noted that the government has already paid ₹11,349 crore to support UPI and provided another ₹2,000 crore budget allocation for 2026‑27, raising the question of whether additional charges on merchants and customers are fair when taxpayers are already subsidising the network.
Policy Concerns: Cash Backlash and Scope Creep
The Hindu’s editorial, “Pay wall: On a charge on UPI transactions”, acknowledges that the amendment is still only an enabling step but warns that removing UPI’s free nature will be unpopular and could be unfair. It flags several policy risks:
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Merchants may pass MDR costs onto consumers, either explicitly or by raising prices, eroding the low‑cost advantage of digital payments.
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If UPI becomes meaningfully more expensive—directly or indirectly—users could shift back to cash, which remains free to use and is still dominant in many parts of India.
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While current plans focus on large merchants and high‑value transactions, the amended law gives government discretion to widen the scope later, prompting concerns about “scope creep” in the absence of strong safeguards.
Some commentators argue for a tiered approach that permanently protects low‑value transactions, noting that payments under ₹500 currently account for around 86% of UPI volume, and those between ₹500 and ₹2,000 another 10%. Making only transactions above ₹2,000 liable for MDR would exempt 96% of person‑to‑merchant (P2M) transactions, they say, preserving inclusion while raising some revenue.
Politics Around UPI Charges: External Pressure Allegations
The MDR debate has quickly turned political. Congress leaders have accused the government of weakening UPI’s free framework and questioned whether external pressure—particularly from US tech companies and President Donald Trump—played a role in the amendment. Congress general secretary Jairam Ramesh has claimed the bill removes safeguards that kept UPI free and suggested it could “allow US companies greater access” to India’s digital payments sector.
The government has strongly rejected these allegations, calling claims of outside influence “unfounded, false and misleading.” Finance Ministry officials have pointed out that if external pressure were decisive, India would neither have launched UPI in 2016 nor kept it free for both merchants and citizens since January 2020, while building it into a globally significant platform.
For now, the bill has been passed in the Lok Sabha—reportedly without substantive debate due to opposition protests—and awaits the next steps in the legislative and regulatory process. The precise MDR rates, thresholds and categories will depend on future notifications and the recommendations of the NPCI‑led steering committee.
What It Means for UPI Users and Merchants
Based on the government’s current stance and industry clarifications, the practical takeaway is:
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Regular users:
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Sending money to friends, family or small vendors via UPI remains free, with no per‑transaction fee.
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Small merchants and kirana stores:
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Expected to remain exempt from MDR, continuing to accept UPI at zero cost under proposed frameworks.
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Large merchants and high‑value business payments:
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May, in future, pay 0.25–0.4% MDR on UPI transactions above ₹2,000, though final rules are pending and may be calibrated further.
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The broader policy question is whether India can design a sustainable funding model for its digital payments infrastructure that keeps UPI free and inclusive for citizens, supports innovation and security, and avoids pushing merchants and consumers back to cash.
For now, the government’s message is that UPI stays free for users, most merchant payments will remain free, and any charges will be tightly targeted. The real test will be whether the eventual MDR regime can deliver that balance in practice.
