Transactions through the Unified Payments Interface (UPI) are no longer free, at least some of them. The government has decided that UPI merchant transactions above ₹2,000 will attract a Merchant Discount Rate (MDR) of 0.4%, with the maximum fee capped at ₹300 per transaction. The new MDR framework will come into force from October 15. UPI has become the financial lifeline for citizens, with annual payments worth over ₹315 lakh crore — almost the size of India’s economy — made through the digital mode. UPI has made parts of the economy almost cash-free, a long-stated goal of the government.
Therefore, it surprises many that the government would ‘undo’ this achievement by agreeing to levy a fee on UPI transactions. Many say this could bring cash back into day-to-day financial transactions. The government has argued that the new fee would apply to less than 4% of UPI transactions by volume. However, 20% of payments by value may attract a fee. For now, person-to-person transactions have been kept out of the scope of any fee.
What made the government finally bite the bullet on UPI charges?
There were murmurs within the payment ecosystem seeking some form of charges to enable participants to recover at least the cost of facilitating transactions. For the longest time, the government categorically rejected the idea of levying charges on UPI transactions. It said no fee would be charged from consumers, a claim it still maintains. The government has also made budgetary allocations —₹2,100 crore for FY27 — to compensate the payment ecosystem for some of the costs.
But things changed when a parliamentary committee earlier this year raised several concerns regarding the long-term viability of the zero-charge model, the primary one being a structural funding gap. The committee observed that the current government incentive of ₹2,000 crore covers only about 11% of the industry’s actual operational costs and roughly 14% of the MDR that would otherwise have been collected.
The panel also flagged that the zero-MDR regime, while helpful for initial growth, could eventually constrain the ecosystem by limiting investment in infrastructure, security and expansion into Tier 3 to Tier 6 cities. The committee, therefore, recommended a policy shift and the adoption of a tiered revenue model.
What kind of costs does the payment ecosystem incur in facilitating free UPI transactions?
Industry estimates indicate that maintaining UPI operations, including server bandwidth, fraud prevention systems and technical support provided by banks, costs around ₹20,000 crore annually. The cost is borne mostly by banks and payment companies.
What are the charges to be levied?
For person-to-merchant transactions above ₹2,000, a fee of 0.4% of the transaction amount will be levied. For example, if one makes a payment of ₹3,000 at a merchant outlet, a fee of ₹12 will accrue. However, there is a cap of ₹300 per transaction, which means payments above ₹75,000 would attract a flat rate of ₹300.
There are other carve-outs, such as payments for utility bills, insurance premiums, fuel and tuition fees, which will attract a concessional rate of `5 per transaction.
According to the National Payments Corporation of India (NPCI), which facilitates UPI services, this rate of 0.4% is significantly lower than alternative payment processing channels such as credit cards or payment gateways. “This balanced approach ensures enterprise merchants contribute reasonably to system upkeep while keeping everyday transaction costs extremely low,” it said in an FAQ.
Does that mean sending money to family and friends via UPI remains completely free?
Yes. The government has specifically mentioned that person-to-person transactions, irrespective of the amount, will remain free. These transactions (P2P) account for 70% of payments by value made through UPI, of which 85% are payments above ₹2,000.
How does UPI MDR compare with traditional debit and credit card MDRs?
For debit cards, the Reserve Bank of India has capped the charge paid by merchants at 0.4% for small merchants using a card machine and 0.3% through QR. For larger merchants, the caps are 0.9% and 0.8%, respectively. Credit card charges are generally higher, at 1.5-3%, and are negotiated between banks, card networks and merchants. Charges are borne by merchants, but small merchants can pass on the burden to end-users.
For those making bank transfers, online NEFT payments are free for savings-account customers. RTGS, used mainly for large transfers of ₹2 lakh and above, can cost up to ₹25 for transfers between ₹2 lakh and ₹5 lakh and ₹50 for transfers above ₹5 lakh, excluding taxes.
Banks can charge less. IMPS charges vary from bank to bank and are typically in the range of ₹2.5-15 per transaction.
Who foots the bill?
Merchant Discount Rates are typically borne by merchants, and this is what UPI MDR, in theory, should be — a cost to be borne by the merchant. The government has categorically said merchants cannot pass on MDR charges to customers while accepting payments through UPI. “The framework ensures consumers pay only the posted price,” the government says.
But user experience suggests this is easier said than done. Many merchant outlets outrightly refuse credit and debit card payments because of MDR charges. If customers insist, some merchants charge a mark-up of 2-3% for payments made with credit or debit cards. Many fear the same could happen with UPI MDR.
How is the government planning to ensure consumers are not passed on the MDR cost?
The government has said it will monitor transactions regularly to ensure merchants do not pass on UPI MDR charges to consumers. Officials from the Department of Financial Services, Ministry of Finance, recently said they will keep a close eye on these transactions to ensure consumers do not bear the burden.
Traders, however, fear that regular monitoring could create unnecessary fear of reprisal among them. Many say such monitoring could deter them from accepting UPI payments.
What provision has been made for smaller merchants?
Smaller merchants receiving up to ₹1 lakh a month through UPI will continue with zero MDR. According to the government, small vendors operate under specialised micro-merchant account classifications (P2PM), which protect them from commercial fees. This special provision has been made keeping in mind that the Person-to-Person Merchant (P2PM) category promotes digital payment acceptance among small merchants and in the unorganised retail sector.
“The MDR framework is specifically structured in a way that small businesses in the unorganised retail sector can accept digital payments without any margin deduction,” says NPCI. Under P2PM guidelines, small merchants receiving up to ₹1 lakh per month through UPI QR codes enjoy mandatory zero MDR.
What specific MDR rates and caps apply to capital market transactions via UPI?
The new guidelines propose a special rate of 0.02% for capital market transactions, such as payments towards mutual funds, bonds and stocks, and payments to stockbrokers and dealers. The cap here is also `300. This special rate covers all regulated entities operating within capital markets, including asset management companies (mutual funds), SEBI-registered stockbrokers, securities dealers and investment platforms. It applies to fund transfers executed via UPI for equity buying, debt-market investments, mutual fund purchases and broker wallet top-ups.
Why are stockbrokers not happy with the decision?
Brokerages are divided over the impact of the proposed 0.02% UPI Merchant Discount Rate (MDR) on capital-market transactions. Zerodha founder Nithin Kamath has warned that the charge could significantly increase costs for brokers, particularly because customers can transfer money into their broking accounts without necessarily executing trades.
Kamath said that if 10,000 customers made 50 UPI transfers of ₹2 lakh each every month without trading, a 0.02% MDR could cost a broker around ₹2 crore a month without generating any revenue. He also highlighted quarterly settlement requirements, under which customers frequently move funds back into broking accounts through UPI.
Since Zerodha does not charge brokerage on equity delivery trades, he said it would be difficult to absorb such costs indefinitely. Kamath suggested capping the charge at ₹5-10 per transaction.
HDFC Securities CEO Dhiraj Relli, however, said the impact would be minimal. He noted that UPI AutoPay transactions for SIPs are excluded and one-time transfers would cost only a few rupees, subject to the ₹300 cap. He said the 0.02% rate, a fraction of the standard 0.4%, represents a considered approach to protecting retail access to markets.
Does the introduction of MDR affect auto-debit recurring payments such as utility bills or OTT/mutual fund subscriptions?
NPCI says automated recurring standing instructions, known as UPI Mandates or AutoPay, do not carry prescribed MDR transaction charges. Payments set up through automated recurring transfers for monthly utility bills, OTT streaming subscriptions and recurring investments will not attract any prescribed MDR charge.
What are the other concessional MDR rates?
Insurance premiums, fuel purchases, utility bills and educational fees are eligible for special MDR concessions under the UPI framework, with transactions above ₹2,000 generally attracting a flat or capped charge rather than the standard percentage-based MDR. Insurance premium payments above ₹2,000, for instance, attract a flat ₹5 MDR. The same ₹5 concession applies to fuel purchases above ₹2,000, while transactions below that remain at zero MDR.
Electricity, water and piped natural gas bill payments above ₹2,000 also attract a flat ₹5 charge, with lower-value transactions remaining free. Educational fee payments above ₹2,000 similarly benefit from flat-fee or capped structures, while payments up to ₹2,000 remain free of MDR.
The concessions aim to prevent high-value essential payments from attracting significant percentage-based processing costs and encourage wider digital adoption.
How much revenue is UPI MDR likely to generate?
Back-of-the-envelope calculations suggest that the UPI payment ecosystem could generate anywhere between ₹15,000 crore and₹20,000 crore, which is roughly the kind of cost the industry incurs in operating the UPI ecosystem. Of the total fee collected, 80% is likely to go to banks — with the issuing bank taking 40%, the acquiring bank 30% and the partner bank of UPI apps taking 10% — while UPI apps such as Paytm and PhonePe would collect the remaining 20%.