India has created a legal path for banks and payment companies to charge fees on some Unified Payments Interface merchant transactions, potentially changing the economics of a system that has largely operated without merchant charges since 2020. The government says consumers and person-to-person payments will remain free, while any future merchant discount rate, or MDR, would apply only to a limited set of transactions above a specified threshold.
The change follows an amendment to the Payment and Settlement Systems Act that removes the blanket prohibition on charging MDR for UPI payments. The government described the amendment as an enabling provision rather than an immediate introduction of fees, with the final structure and rate still to be determined.
Most UPI Transactions Would Remain Free
India’s Ministry of Finance said any MDR introduced would be nominal and considerably lower than the rates typically charged on debit or credit card transactions. It also said the “vast majority” of merchant payments would remain free and that person-to-person transfers would not be charged.
One approach under discussion would apply fees only to higher-value transactions involving larger merchants. Such a structure could allow banks and payment companies to recover some of the costs of processing UPI transactions without imposing fees on small shops, street vendors, or consumers making everyday payments.
The question is important because UPI has become one of the world’s largest real-time payment systems. In July 2026 alone, it processed 23.66 billion transactions worth about ₹29.9 trillion, according to the Indian government, and the system is now available in 11 countries outside India.
UPI was launched in 2016 by the National Payments Corporation of India, or NPCI, and allows users to make instant bank-to-bank payments through compatible apps. Its interoperable design means customers of services such as Google Pay and PhonePe can transact across the same underlying network rather than being limited to one provider.
Merchant Adoption Has Been Central to UPI’s Growth
One reason UPI expanded so quickly is that merchants can accept payments using inexpensive QR codes without buying conventional card terminals. Zero MDR has also removed a financial reason for small businesses to discourage digital payments.
The government now argues that the infrastructure needs a more sustainable funding model as transaction volumes grow. It cited rising costs associated with cybersecurity, fraud prevention, technology upgrades, and expanding the network into rural and semi-urban areas.
The tradeoff will depend heavily on where any future charges are applied. Fees limited to large merchants and high-value purchases would leave most everyday UPI usage unchanged, while broader charges could alter the incentives that helped bring millions of smaller businesses onto the network.
India has not yet announced the final MDR rate or transaction threshold. The government says UPI will remain free for citizens even if selected merchant charges are introduced.
Featured image credits: Wikimedia Commons
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