Why in news?

The Lok Sabha passed the Taxation and Other Laws (Amendment) Bill, 2026 recently, opening the door for banks and payment system providers to charge fees on UPI and RuPay debit card transactions.

This sparked fears that merchants would pass the cost on to consumers. Responding to the controversy, the Finance Ministry "categorically" clarified that UPI will remain free for citizens, with only a nominal fee possibly applying to certain merchants.

What’s in Today’s Article?

• About Merchant Discount Rate (MDR)
• Who Pays for UPI Today?
• What the New Bill Changes?
• Government's Reassurance
• Why the Government Wants a Change?

About Merchant Discount Rate (MDR)

• Merchant Discount Rate (MDR) is a fee merchants pay banks and payment processors for using their networks.
• It has four components:
  • Interchange fee — paid to the card-issuing bank
  • Processing charges — paid to payment gateways (RazorPay, PayU, CCAvenue, etc.)
  • Network fee — paid to payment networks (Visa, Mastercard, NPCI)
  • Tax — GST paid to the government
• Since 2020, the government has mandated zero MDR on UPI and RuPay debit card transactions.
• Other payment modes, however, do attract MDR:
  • 0.4-0.9% on non-RuPay debit cards,
  • 1.5-2.2% on domestic credit cards,
  • 1-1.5% on netbanking, and
  • 3-4.5% on international credit cards.

Who Pays for UPI Today?

• Currently:
  • Banks and payment processors absorb part of the cost.
  • Taxpayers bear the rest through government subsidy.
• Under the 'Incentive Scheme for Promotion of Low-Value BHIM-UPI Transactions (P2M)', launched in December 2021, the government subsidises UPI transactions below ₹2,000.
• This subsidy is capped at 0.15% of transaction value and shared among banks, payment service providers, and third-party apps.
• The government paid ₹1,389 crore in 2021-22, rising to ₹3,631 crore by 2023-24, but this has since fallen, with only ₹2,000 crore budgeted for 2026-27.
• Notably, from 2021-22 to 2024-25, the total subsidy of ₹8,730 crore covered just 11% of the actual cost incurred by the payments industry, as per the Standing Committee on Finance.

What the New Bill Changes

• The Payment and Settlement Systems Act, 2007 currently bars banks from charging for payments made via modes listed under Section 269SU of the Income Tax Act, 1961 — which includes RuPay debit cards, UPI, and BHIM-UPI (including QR code payments).
• The 2026 Amendment Bill modifies this provision, empowering the government to notify which transactions can attract an MDR charge in future.
• Section 269SU — the provision being amended — currently applies to businesses with an annual turnover above ₹50 crore.
• However, this is not the threshold likely to be used for the new MDR charge. Government sources indicate the actual MDR would apply to a much smaller category of merchants — those with turnover above roughly ₹1-1.5 crore — and only on individual transactions above ₹2,000.
  • In other words, the fee is expected to target a narrower, lower-turnover set of merchants than what Section 269SU currently covers, not a wider one.
• A possible MDR of 0.25-0.4% (industry sources) or "nominal, far lower than card MDRs" (Finance Ministry) is being discussed — this would exclude roughly 95% of current UPI transactions.
• Notably, though only 4% of person-to-merchant (P2M) UPI transactions in 2025-26 exceeded ₹2,000 in value, these accounted for around two-thirds of total UPI payment value — meaning the fee, if applied, would target high-value transactions disproportionately.

Government's Reassurance

• The Finance Ministry stated:
  • All person-to-person UPI transactions will remain free, with no charges on ordinary consumers.
  • Small merchants (kirana stores) will not face MDR.
  • Any MDR, if introduced, will be threshold-based, not blanket, and far lower than debit/credit card MDR rates.
  • The Payments Council of India (PCI) also clarified that consumers won't pay extra even for UPI transactions to large merchants.
• Experts note that while the Bill technically gives the government power to levy MDR on any UPI transaction, it is unlikely to impose broad charges.
• Digital and financial inclusion remain central to government policy, and UPI's biggest appeal has been that it is free — making a broad rollback risky, as it could push users back toward cash.

Why the Government Wants a Change?

• UPI has grown explosively — from its 2016 launch to over 24,000 crore transactions worth ₹314 lakh crore in 2025-26 (up 30% and 21% respectively from the previous year), making it the world's largest real-time payment system.
• The Finance Ministry argues that subsidies alone cannot sustain the next phase of growth, especially expansion into rural and semi-urban areas, and that a "balanced framework" is needed to keep UPI "robust, inclusive, and future-ready."

Conclusion

While the Amendment Bill legally enables UPI charges, the government's assurances and India's digital inclusion priorities suggest ordinary users and small merchants will stay protected.

The real question going forward is how a "self-sustainable" UPI can be built without undermining the very affordability that made it a global success story.