UPI’s Free Ride Is Over

In the last 10 years, UPI has changed how India transacts. What began as a simple, instant and interoperable way to transfer money between individuals has become an intrinsic part of everyday life, built around one powerful promise: fast, frictionless and free digital payments.

But almost a decade into that journey, the government has now opened the legal door to charging a Merchant Discount Rate (MDR) on some UPI transactions, raising countless questions. UPI may still be fast, but the MDR will definitely add some friction and it will no longer be free.

The Lok Sabha on August 6 passed the Taxation and Other Laws (Amendment) Bill, 2026, which seeks to amend the Payment and Settlement Systems Act, 2007, clearing the legislative path to introduce a Merchant Discount Rate (MDR) on UPI transactions. The Bill will now move to the Rajya Sabha.

Finance minister Nirmala Sitharaman has been quick to clarify that any MDR would be charged to merchants and not consumers. According to her, the levy would allow banks and fintechs to invest more in infrastructure, innovation and security. While the UPI and Services Steering Committee, headed by NPCI, is yet to decide whether MDR will actually be introduced, there is a larger debate emerging around who pays for India’s near-free digital payments ecosystem.

Just a day before the Bill was passed, RBI governor Sanjay Malhotra said consumers would ultimately have to bear the cost of transactions in some way or another.

And that is what makes the UPI MDR debate more complicated. The question is not just whether merchants can absorb a 0.05%, 0.07% or even 0.3% charge for accepting UPI. It is also about whether introducing a cost into a payment system built on zero charges could eventually change how consumers and merchants use it.

For a decade, zero MDR has been one of the defining features of UPI. It helped turn the payment rail from a digital alternative into a default payment habit for millions of Indians.

Now, as transaction volumes surge and the cost of maintaining the ecosystem rises, the industry wants that model to change. This makes us question: why is the government considering MDR now? How expensive is it to keep UPI “free”? And who actually benefits if MDR is introduced? Let’s try to answer some of these questions in this edition of The Outline.

UPI Has Started To Look Expensive

The economics of UPI have always been slightly unusual. The network has grown at an extraordinary pace, but the primary transaction rail has remained effectively free. UPI transactions have carried zero MDR for nearly 10 years, meaning payment aggregators, banks and other ecosystem participants cannot charge merchants for processing most UPI payments.

This worked beautifully when the priority was adoption. But adoption is no longer a hurdle. UPI processed 2,366 Cr transactions in July, up from 2,272 Cr in June. Transaction value rose to ₹29.88 Lakh Cr from ₹28.92 Lakh Cr during the same period.

While UPI now accounts for around 60-65% of the transaction volume passing through payment aggregators, under the current zero-MDR regime, that means a significant chunk of the industry’s transaction volume generates no direct revenue.

For payment aggregators whose business is fundamentally about collecting payments for merchants, that turns what should theoretically be a revenue line into a cost centre.

While the government has attempted to bridge this gap through incentive schemes, these have not kept pace with the network’s growth. The RuPay and BHIM UPI incentive scheme peaked at ₹3,631 Cr in FY24. The budgeted outlay subsequently fell to ₹1,441 Cr in FY25 and ₹437 Cr in FY26, before being revised upwards after industry pushback.

Meanwhile, UPI volumes jumped from 172.2 Bn transactions in 2024 to 228.3 Bn in 2025. Industry estimates suggest that ₹4,000-5,000 Cr a year may be required simply to cover person-to-merchant (P2M) transaction costs.

This is the UPI paradox. India wants UPI to behave like critical digital infrastructure, but it has largely been funded like a public-good experiment. Therefore, the model has now become increasingly difficult to sustain as volumes explode. 

Hence, the industry is making a fairly straightforward argument: if banks, fintechs and payment companies are expected to continuously invest in infrastructure, cybersecurity, fraud prevention and innovation, there needs to be some mechanism through which those investments can eventually be recovered.

The Payments Council of India (PCI) has backed the decision, saying that sustained investment is necessary to run the real-time payments system reliably.

UPI’s MDR Push Has A US Angle Too

The government’s move to create a legal framework for charging MDR on UPI and RuPay transactions has brought another factor into the debate: US trade pressure. According to trade policy experts, the Trump administration has repeatedly pushed trading partners to ensure a “level playing field” for US companies operating in digital markets.

That has put India’s zero-MDR regime under scrutiny. In its March 2026 report on foreign trade barriers, the US Trade Representative (USTR) flagged India’s zero-MDR policy for UPI and RuPay as a potential barrier that could disadvantage foreign payment networks. The concern is particularly relevant for US payment giants such as Visa and Mastercard, which operate under a fee-based model and compete with India’s largely free UPI infrastructure.

But this does not mean the proposed MDR is a direct response to US pressure. It could be just another factor. The Indian government, however, maintains that the move is about addressing the rising cost of maintaining UPI and creating a sustainable revenue model for banks and payment companies.

Who Feels The Pinch?

The proposed MDR framework reportedly targets larger merchants with annual turnover of around ₹1-1.5 Cr or more, charging a 0.05%-0.07% fee on UPI transactions above ₹2,000.

The idea is to keep India’s smallest merchants and the bulk of low-value transactions outside the charging framework while monetising a relatively narrow slice of UPI.

While card payments in India have historically carried an MDR of around 1.8%, a 0.05%-0.07% MDR on UPI may look negligible on paper. But consumers don’t think like this. They think about whether a payment is free or not.

A Local Circles survey, which received more than 45,000 responses from 322 districts, found that 53% of respondents said they would move away from UPI for transactions above ₹3,000 if MDR were imposed on large merchants. Of those, 27% said they would switch to credit cards, 14% to debit cards and 12% to bank transfers or cash. 

This does not mean 53% of UPI users will stop using UPI but shows that people’s payment choices are influenced not just by cost but by how easy and frictionless a payment feels. 

The industry, meanwhile, argues that payment acceptance should remain a business expense rather than become a consumer surcharge. But the possibility of merchants passing on the cost, directly or indirectly, remains one of the biggest fault lines in the debate.

And that is why regulators may need to be very explicit about preventing MDR from becoming a visible surcharge at the point of payment. 

Winners Of MDR

With MDR, enterprise-focused payment aggregators could finally monetise a substantial portion of the transaction volume they currently process without a direct fee. Banks could also get a better return on the infrastructure investments they have been making to support the ever-growing UPI volumes.

Smaller technology-led players could potentially find it easier to compete because they would no longer be operating in a market where a significant part of the payment value chain earns zero transaction revenue.

But the consumer-facing third-party apps, including PhonePe, Google Pay, Paytm, Amazon Pay, Navi, super.money, may not be the primary beneficiaries. These apps already derive revenue from other parts of the payment ecosystem and are not necessarily dependent on charging users for every UPI transaction. So, if MDR is introduced, the money may flow primarily towards the bank and payment aggregator layers, rather than directly transforming the business models of UPI apps.

As per industry sources, backend MDR should not affect UPI adoption, especially with transactions below ₹2,000 largely outside the proposed framework. But the LocalCircles survey suggests higher-value transactions could see resistance and people could move away from UPI for transactions above ₹3,000 if MDR is imposed on large merchants.

That leaves the government with a tricky balancing act: UPI needs sustained investment in infrastructure, cybersecurity and fraud prevention, but the next phase cannot simply be about finding someone to charge. It has to create a sustainable revenue model without disrupting the consumer habit that made UPI so successful.

[Edited by Shishir Parasher]

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