UPI Stays Free — But the Rules Behind It Are Shifting

The real question is whether the cost stays confined to the merchant side or finds its way into prices.

For a decade, UPI has run on one promise: instant, free and frictionless. That promise is now being tested. Parliament has cleared the legal path for a Merchant Discount Rate (MDR) on UPI transactions. Untangling what this actually means matters more than the headlines around it.

The Taxation and Other Laws (Amendment) Bill, 2026, passed by both Houses this month, amends Section 10A of the Payment and Settlement Systems Act, 2007. It is, by the government's own description, an enabling provision — it does not impose any charge itself.

It creates a mechanism through which the NPCI-headed UPI and Services Steering Committee can later decide whether an MDR should apply and to what. No such decision has been finalised.

Consumers, including all peer-to-peer transfers and the vast majority of merchant payments, remain untouched. Any future MDR is expected to target a narrow band: merchants above roughly Rs 1-1.5 crore annual turnover, on transactions above Rs 2,000, at 0.05-0.07 per cent — a fraction of the 1.8 per cent long charged on card payments.

The framework is structured to leave close to 90 per cent of UPI-accepting merchants, mostly small and micro-businesses, outside it entirely.

Industry Push

The economics behind the push are straightforward. UPI processed 2,366 crore transactions worth nearly Rs 30 lakh crore in July alone and now accounts for 60-65 per cent of the volume flowing through payment aggregators.

Under zero MDR, all of that volume generates no direct transaction revenue. This turns what should be a revenue line into a cost centre for the companies actually running the rail.

Government incentive schemes meant to offset this haven't kept pace. The RuPay/BHIM incentive outlay fell from Rs 3,631 crore in FY24 to Rs 437 crore in FY26 before being revised up after industry pushback.

Meanwhile, transaction volumes jumped from 17,220 crore in 2024 to 22,830 crore in 2025. Industry estimates put the annual cost of processing merchant transactions alone at Rs 4,000-5,000 crore.

That cost is currently absorbed by banks and aggregators, with no mechanism to recover it. The Payments Council of India has backed the change on these grounds, arguing that sustained investment in infrastructure, cybersecurity and fraud prevention needs a funding mechanism to survive at this scale.

The Key Question

This is where the debate sharpens. The RBI Governor observed, just before the bill passed, that consumers ultimately bear such costs "in some way or another". This would not be a visible fee but through pricing that businesses adjust over time.

That's a structurally different claim from "consumers won't be charged". Both can be true at once: no one sees a UPI fee on their app, while merchants who pay MDR gradually build it into prices, as most costs eventually are.

A Local Circles survey of over 45,000 respondents across 322 districts found that 53 per cent would consider moving away from UPI for transactions above Rs 3,000 if MDR applied to large merchants.

Of these, 27 per cent would move towards credit cards, 14 per cent towards debit cards, and 12 per cent towards cash or bank transfers.

That doesn't mean half of India's UPI users are about to switch. It does mean payment behaviour often responds to the perception of a cost, not its actual, often negligible size.

That is why regulators may need to be explicit about keeping any future MDR invisible at the point of sale, rather than allowing it to surface as a checkout surcharge.

Who Gains

Enterprise-focused payment aggregators and banks stand to benefit most directly, finally earning revenue on volume they currently process for free. Smaller technology-led players may also find it easier to compete in a market no longer weighted towards zero-revenue transactions.

Notably, the big consumer apps PhonePe, Google Pay and Paytm aren't expected to be primary beneficiaries, since they already monetise elsewhere in their business. Any MDR revenue would likely flow to banks and aggregators rather than reshape how these apps make money.

For Users

Nothing changes today. Peer-to-peer transfers and the overwhelming majority of merchant payments stay free, and that isn't in dispute.

What exists now is only the legal door for a narrowly scoped fee to be introduced later on a specific slice of larger merchant transactions. That decision sits with NPCI's committee, not this bill.

The more useful thing to watch isn't whether UPI is "ending" as a free system. Every clarification so far says it isn't.

The question is whether, once a fee is eventually finalised, its cost stays confined to the merchant side. Or does it find its way, gradually and indirectly, into the price of the things UPI is used to pay for?

(The writer is an IT professional based in Thane. Views personal.)