India’s free Unified Payments Interface (UPI) ecosystem could be heading towards its biggest policy shift since its launch. The Centre has introduced amendments to the Payment and Settlement Systems Act in Parliament, creating a legal framework that could allow merchant charges on select UPI transactions in the future.
Although no fee has been approved yet, the proposed changes have sparked widespread discussion across the digital payments industry. If implemented, the policy could introduce a Merchant Discount Rate (MDR) on high-value UPI payments, particularly those made to large businesses, while ordinary consumers are expected to continue enjoying free digital transactions.
The proposal marks a significant step in the evolution of India’s digital payments landscape, which has become one of the largest and fastest-growing payment ecosystems in the world.
UPI Payment Fee Proposal Explained
The amendment tabled by Finance Minister Nirmala Sitharaman does not immediately impose any charges on UPI transactions. Instead, it gives the government the legal authority to introduce an MDR in the future if policymakers consider it necessary.
According to reports, one of the options under discussion is to levy a merchant fee of 0.3% to 0.5% on UPI payments exceeding Rs 2,000. However, the proposal is expected to apply only to businesses with an annual turnover exceeding Rs 1.5 crore.
This means customers making payments through UPI are unlikely to face any additional charges directly. Instead, the processing fee would be paid by eligible merchants, similar to the system already followed for credit and debit card payments.
Government officials have clarified that no final decision has been taken regarding the fee structure, rate or implementation timeline.
Small Businesses Likely to Remain Protected
Policymakers are also considering an alternative model where merchant charges are linked to annual business turnover rather than individual transaction values.
Under this approach, neighbourhood shops, small retailers and micro-enterprises could continue enjoying zero-cost UPI acceptance, while larger businesses handling substantial transaction volumes may be required to pay processing charges.
The objective is to ensure that any future MDR does not discourage small merchants from accepting digital payments, which have become an integral part of India’s retail economy.
Industry experts believe such a tiered system would strike a balance between promoting digital inclusion and ensuring the long-term sustainability of payment infrastructure.
Why the Industry Wants Merchant Charges
Payment service providers and fintech companies have long argued that the zero-MDR policy has made it difficult to build a sustainable business model.
Currently, banks, payment aggregators and fintech firms earn little or no revenue from processing UPI transactions despite investing heavily in technology, cybersecurity, payment infrastructure and customer support.
Unlike UPI, merchants already pay processing fees on card transactions. Credit card payments generally attract an MDR of around 1.5%, while debit card charges vary depending on banks and payment networks.
Industry stakeholders believe introducing a limited MDR on high-value UPI transactions would generate sufficient revenue to support innovation, infrastructure upgrades and expansion of digital payment services.
UPI Continues to Break Records
The discussion comes at a time when UPI continues to dominate India’s digital payment ecosystem.
Official figures show that the platform processed 23.6 billion transactions worth nearly Rs 29.9 trillion during July alone, making it one of the world’s largest real-time payment systems.
Applications such as PhonePe and Google Pay continue to account for a majority of UPI transactions across the country.
Although payments exceeding Rs 2,000 represent only a small percentage of total merchant transactions, they contribute a disproportionately high share of overall payment value.
Industry analysis suggests that transactions above this threshold account for nearly 67% of merchant UPI payment value while making up only about 4% of transaction volume.
Because of this concentration, introducing MDR only on high-value transactions could generate substantial revenue without affecting most daily digital payments.
What Happens Next?
The proposed amendment currently serves only as an enabling legal provision. The government has not announced when or whether merchant charges will actually be introduced.
Officials are expected to hold further consultations with banks, fintech companies, payment service providers and industry stakeholders before taking a final decision.
If implemented carefully, the UPI Payment Fee Proposal could create a more sustainable financial model for India’s digital payments industry while ensuring that ordinary consumers and small merchants continue benefiting from free and convenient UPI services.
Until any official notification is issued, UPI payments will continue to remain free under the existing framework. However, the latest proposal signals that India’s digital payments ecosystem may soon enter a new phase, balancing rapid growth with long-term financial sustainability.
