In September 2026, the National Payments Corporation of India (NPCI) proposed a merchant discount rate (MDR) of 0.4 percent on specified person-to-merchant (P2M) UPI payments above ₹2,000, capped at ₹300 for transactions of ₹75,000 and above. Payments up to ₹2,000, person-to-person transfers and payments received by small merchants registered under the Person-to-Person-Merchant (P2PM) category, receiving up to ₹1 lakh monthly through UPI QR codes, remain exempt. The government estimates that 96 percent of P2M transactions will remain unaffected.
Government disbursements under the incentive scheme for RuPay debit cards and low-value BHIM-UPI transactions fell from ₹3,631 crore in 2023–24 to ₹1,046 crore in 2024–25. This strengthens the case for examining alternative funding models, including merchant contributions.
The economic justification for a merchant fee, however, depends on how rates are determined, what costs they recover and how collections are distributed. Do these charges reflect independently verified costs, and what regulatory oversight ensures that tariff decisions serve the payment ecosystem as a whole?
Who Sets UPI's Price?
An August 2026 amendment to Section 10A of the Payment and Settlement Systems Act, 2007, enabled the proposed charge by making the statutory prohibition on payment charges applicable to modes notified by the Central Government, rather than those prescribed under Section 269SU of the Income-tax Act, 1961. A notification issued on 14 September retained protection against charges for RuPay debit card payments and UPI transactions up to ₹2,000.
The Department of Financial Services' FAQ of 15 September states that operational parameters, fee distribution models and category caps are decided by the UPI and Services Steering Committee, headed by NPCI, with representatives from banks, payment service providers and industry associations.
The institutional concern arises from NPCI's position within the payment ecosystem. NPCI is an RBI-authorised, bank-promoted operator of retail payment systems, while MDR collections are shared among participants, including banks and payment application providers. Industry participation brings operational expertise, but allowing institutions that receive these revenues to influence their determination creates a potential conflict of interest.
Although NPCI and participating institutions operate within the RBI's regulatory framework, what independent scrutiny applies to the tariff methodology and revenue allocation decisions remains unclear. The question is whether these decisions reflect the costs and interests of the payment system as a whole.
A Merchant Fee Needs an Economic Basis
The proposed tariff varies across transaction categories, with a flat ₹5 charge on payments above ₹2,000 in sectors such as railways, telecom, insurance and fuel, and a rate of 0.02 percent for capital-market transactions involving broking and mutual fund accounts.
Such differentiation may reflect processing costs, settlement arrangements, risk or public-policy priorities. Yet the economic basis for the standard 0.4 percent rate, and the extent to which sectoral concessions reflect costs rather than policy preferences, remains unclear.
The Department of Financial Services' FAQ cites an industry estimate of approximately ₹20,000 crore annually for UPI operations, covering infrastructure, bandwidth, fraud prevention and bank technical support. However, the underlying calculation and distribution of these costs across participating institutions have not been published.
A meaningful assessment would identify UPI-specific infrastructure and operating costs, distinguish them from NPCI's expenditure on other payment systems, and account for the contributions of banks and payment service providers. It would also consider existing public support, avoid double-counting and establish how much of the total cost the proposed MDR is intended to recover.
Revenue allocation requires similar scrutiny. The framework provides for an amount equivalent to 5 percent of MDR collections to support small-merchant UPI adoption, with the fund's operational arrangements to be finalised in consultation with the RBI. The remaining distribution among banks, payment gateways and application providers should likewise have a published rationale linking revenue shares to costs and services.
India has a precedent for regulator-led payment pricing. In December 2017, following stakeholder consultation, the RBI prescribed differentiated maximum MDRs for debit card transactions based on merchant turnover and acceptance mode. Rates were capped at 0.40 percent for merchants with annual turnover up to ₹20 lakh and 0.90 percent for larger merchants, with lower rates for QR-based acceptance. The framework sought to widen merchant acceptance while sustaining service providers.
Although debit cards and UPI have different cost structures, the precedent demonstrates how tariff decisions can be supported by regulatory assessment, consultation and published criteria.
Policy Uncertainty Has Costs for Merchants
The proposed MDR follows changing policy signals. In August 2022, the Finance Ministry described UPI as a digital public good and ruled out charges. In June 2025, it dismissed reports of an impending MDR. The enabling amendment followed in August 2026, with the tariff announced in September. Implementation, scheduled for 15 October, was deferred on 13 October until after Diwali, with a revised date to be notified.
These developments do not necessarily constitute reversals of a permanent zero-MDR commitment. They nevertheless create uncertainty for merchants planning their payment arrangements and anticipating acceptance costs.
The ₹2,000 threshold may also influence transaction behaviour. Under the standard 0.4 percent category, a ₹2,000 payment attracts no fee, while ₹2,001 generates an MDR of approximately ₹8. This discontinuity could encourage splitting of transactions or a shift towards personal transfers. The extent of such responses will depend on the administration of merchant classifications, thresholds and exemptions. Although direct pass-through of MDR to customers is prohibited, the additional cost could influence payment preferences, particularly among low-margin businesses.
The case for a merchant fee ultimately depends on whether its economic justification and allocation can withstand independent scrutiny. The Payments Regulatory Board, constituted within the RBI's regulatory framework, should have an explicit role in reviewing tariff methodology and revenue distribution. Published cost assessments, stakeholder consultation and periodic reviews would help ensure that charges reflect actual costs and changes in payment infrastructure.
Such scrutiny may validate the proposed rates, support their revision or point towards a different combination of merchant contributions and public funding. The central policy question is how India can recover the costs of operating UPI through a pricing framework that is economically justified, institutionally accountable and predictable for merchants.