The Unified Payments Interface (UPI), the world’s largest digital payment system, has become the financial lifeline of the country, with over 22 billion monthly transactions valued at around ₹30 lakh crore. Developed locally and launched in 2016, UPI is the cornerstone of what is now known as India Stack — a set of open APIs and digital public goods that aims to unlock the economic possibilities of identity, data, and payments at population scale. The government has now set its sights on expanding cross-border payments through UPI, and the system is already operational in eight countries, including France, the UAE, and Singapore.
The UPI network is expanding rapidly, largely due to the government’s policy of keeping transactions free for now. However, operating a system at such a massive scale entails significant costs for banks and other stakeholders. The government currently bears part of this burden by compensating banks and payment infrastructure providers that are part of the growing ecosystem. There have been increasing demands from these players to levy charges on UPI transactions, but the government and the regulator — the Reserve Bank of India — have so far maintained a firm stance on keeping transactions free, citing the larger public good.
Now, a parliamentary committee has called for a shift in this policy to ensure the financial sustainability of the UPI ecosystem. The Thirty-Second Report of the Standing Committee on Finance (2025–26) makes a strong case for a “tiered” revenue model, warning that in its absence, the UPI system could become unsustainable and hinder innovation and adoption, particularly in underserved regions.
Status of UPI charges
Since January 1, 2020, a zero-MDR (merchant discount rate) framework has been in place for all BHIM-UPI transactions to encourage digital adoption. To compensate banks and payment system providers for the revenue loss due to zero MDR, the government provides an annual incentive.
For the financial year 2026–27, the Department of Financial Services (DFS) has proposed a Budget Estimate (BE) of ₹2,000 crore for the Scheme for Promotion of RuPay Debit Cards and low-value BHIM-UPI person-to-merchant (P2M) transactions. The Committee noted that while the overall budget for the Department increased significantly, this allocation is a key driver of that increase.
Speaking to this newspaper after the Budget announcement, M Nagaraju, Secretary, DFS, said that the ₹2,000 crore allocation as subsidy support for UPI payments is aligned with existing policy, and any future shortfall will be addressed as required. He indicated that the government remains open to recalibrating the subsidy or even revisiting the question of making certain UPI transactions chargeable, depending on evolving policy needs.
“The ₹2,000-crore provision for UPI is made in line with existing policy and projected requirements. If there is any shortfall, it can always be addressed at the revised estimates stage, as has been done in the past — there have been significant variations between Budget Estimates and Revised Estimates in earlier years as well,” Nagaraju said.
However, the ₹2,000 crore provision for 2026–27 is lower than the current financial year’s payout of ₹2,196 crore, which itself was sharply raised from a Budget Estimate of ₹476 crore.
Committee’s observations
The Standing Committee on Finance 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 (₹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.
It further noted that the absence of a commercial revenue model (MDR) makes it difficult for payment system providers (PSPs) and banks to maintain and upgrade digital payment infrastructure.
The committee stated: “UPI is capable of expanding 10x given demographics, economic growth, and geographic spread. It is expected to add an additional 600 million users and process 100 to 150 billion transactions per month over the next five to seven years. However, achieving this scale is challenged by slowing growth momentum and the structural funding gap, which limits ecosystem investment in infrastructure, security, and merchant onboarding.”
Recommendations
The committee suggested a policy shift to ensure the financial health of the UPI ecosystem. It recommended that the DFS and RBI explore a self-reliant, tiered revenue model. Under this model, transactions for small merchants and low-value payments would remain free, while larger entities and higher-value transactions could be charged to sustain the system.
The goal is to ensure that the UPI ecosystem does not continue to strain the government exchequer and can fund its future growth independently. The recommendation to levy charges is not new, and several ideas are already under discussion at both the government and regulatory levels.
Earlier, Nagaraju had said that multiple proposals are being examined and that the final decision will depend on the evolving policy framework. “Once these ideas are discussed at the government level, the threshold will also emerge,” he said.
Amon the proposals under consideration is to levy charges on UPI transactions above a certain threshold while keeping nearly 90% of transactions free of charge.
Pushing for change
With the RBI pushing for changes in the UPI ecosystem to enhance transaction safety and security, the upfront costs of implementation are expected to rise. In a recent draft regulation, the regulator proposed introducing delays for high-value transactions above ₹10,000 to create a cooling-off window during which a transaction can still be cancelled.
Another proposal is to cap annual credits at around ₹25 lakh for accounts that have not undergone enhanced due diligence. Additional measures include allowing users to switch payment modes on or off, set transaction limits, and activate a “kill switch” to disable all digital transactions in case of suspected fraud.
To protect vulnerable users such as senior citizens and the differently abled, the RBI has also proposed requiring additional approval from a “trusted individual” for transactions above ₹50,000.
According to industry players, these proposals will increase costs for banks, particularly in technology and operations. Payment flows will need to be re-engineered to support conditional holds, exception handling, and safeguards such as trusted-person authentication. “These are not superficial changes, as they affect core transaction processing systems that have so far been optimised for instant settlement,” said Amit Das, Founder and CEO, Think360.ai.
With operational costs rising, UPI cannot rely solely on government incentives and budgetary support. It will need to develop a fee structure that compensates stakeholders while keeping most transactions affordable. Person-to-merchant transactions account for 60% of total UPI volumes, with an average ticket size of about ₹600, compared to an overall average of ₹1,300.
The government could consider levying a nominal charge on transactions above a certain threshold — say ₹10,000 — without significantly disrupting the ecosystem.