Context:

• There is the need to examine the proposed change to Section 10A of the Payment and Settlement Systems Act, through the Taxation Laws (Amendment) Bill, 2026.
• The amendment replaces the existing prohibition on charges for BHIM-UPI and RuPay with an enabling provision under which the government may notify modes of payment on which charges can be imposed.
• While no charge has been introduced yet, opening this door could undermine the foundational principle of free and universal digital payments.

UPI - From Payment Innovation to Public Digital Infrastructure:

• When Unified Payments Interface (UPI) was introduced (by NPCI), the objective was to reduce dependence on cash by providing a simple, interoperable and low-cost payment system.
• UPI has since become the backbone of India's digital payments ecosystem. For example, it processed over 24,000 crore transactions in 2025-26, roughly 66 crore transactions a day, worth about ₹314 lakh crore.
• It accounted for around 85% of India's digital retail payments and nearly half of the world's real-time payments.
• A large proportion of transactions are small-value payments—around ₹1,300 on average, with 86% of merchant payments below ₹500.
• These include everyday payments to vegetable vendors, autorickshaw drivers, small shops and street businesses.
• Thus, UPI's significance lies not merely in transaction volumes but in its ability to formalise small-value economic activity and make digital payments accessible to ordinary citizens.

Why MDR is the Wrong Pricing Model?

• Merchant Discount Rate (MDR) originated in the card-payment ecosystem, where multiple intermediaries—issuer, acquirer and payment network—share costs and assume risks associated with physical infrastructure and credit.
• UPI operates differently:
  • It is based on interoperability, rather than closed payment networks.
  • Transactions move directly between bank accounts.
  • There is no physical card or terminal.
  • There is no comparable credit-default risk.
  • Settlement is almost instantaneous.
  • UPI is built on an open protocol and common infrastructure.
• Therefore, applying the traditional MDR model to UPI would amount to imposing an inappropriate legacy pricing mechanism on a fundamentally different digital public infrastructure.

The Cost of Zero-MDR UPI:

• Banks and payment providers nevertheless incur real costs in operating UPI. The government has attempted to bridge this gap through incentives.
• However, the projected expenditure on these incentives has increased sharply—from about ₹3,631 crore to nearly ₹4,373 crore.
• The solution should not be to recover these costs directly from merchants and consumers through MDR.

Alternative - Fund UPI Through the Savings it Creates:

• The state and financial system derive substantial savings from digitisation:
  • The RBI spends ₹5,000–6,400 crore annually merely on printing currency.
  • Digital payments reduce the costs of cash printing, storage, transportation and handling.
  • Banks benefit from the lower-cost digital transaction ecosystem and the ability to retain deposits and lend them.
  • Digitalisation reduces transaction costs across the economy.
• Hence, if UPI generates savings for the government and banks, a portion of these savings can finance the infrastructure that generates them.

Why MDR Could Become Self-Defeating?

• India's digital-payment transition remains price-sensitive. Even a small MDR can make digital transactions less attractive than cash.
• For example, a merchant charged 2% may pass the cost to customers as a “digital payment charge” or discourage digital payments altogether.
• Even a 0.3% charge could significantly affect merchants operating on thin margins.
• The result could be a reversal of India's cash-to-digital transition, particularly among small merchants.

Protecting UPI as a Public Good:

• UPI has succeeded because it is free, instant, interoperable, universal, and accessible.
• Its expansion has brought millions of people and small businesses into the formal digital economy.
• Therefore, UPI should not be treated simply as a commercial payment product. It is a form of digital public infrastructure, and its benefits extend beyond individual transactions.

Way Forward:

• Instead of imposing MDR:
  • Fund UPI through savings generated by reduced cash dependence.
  • Develop transparent, formula-based support for payment infrastructure.
  • Ensure that any support is linked to value delivered, rather than transaction pricing.
  • Preserve affordability for small merchants and consumers.
  • Avoid policies that could encourage a return to cash.
• The debate illustrates the broader challenge of balancing financial sustainability with inclusive digital public infrastructure.
• India's UPI model demonstrates how interoperability, network effects and state-supported digital infrastructure can reduce transaction costs while promoting financial inclusion.

Conclusion:

• The central proposition is clear: UPI should remain free at the point of use.
• If digitalisation saves money for the government and banks, those savings should help finance UPI rather than recovering costs through MDR from merchants and consumers.
• Preserving zero-cost UPI is therefore presented not merely as a payment-policy choice, but as a means of protecting India's cash-light, inclusive and digitally enabled economy.