In August 2026, the Unified Payments Interface (UPI) processed 24.51 billion transactions worth ₹29.82 lakh crore, demonstrating the scale of India's digital payments infrastructure. The proposed Merchant Discount Rate (MDR) of 0.4 percent on eligible person-to-merchant payments above ₹2,000 brings its financing into sharper focus. Smaller payments, person-to-person transfers and eligible small merchants remain exempt, with the government estimating that roughly 96 percent of merchant transactions will be unaffected. The central policy question is whether the charge can help finance the payments ecosystem without creating significant distortions in merchant and customer behaviour.
Why the ₹2,000 Threshold?
Zero or low merchant charges helped build participation on both sides of UPI by encouraging acceptance and strengthening network effects. Introducing merchant contributions could reduce dependence on public support and provide a more sustainable revenue stream for payment infrastructure. The challenge is to preserve the incentives that enabled UPI's expansion.
Global investment bank Jefferies estimates that transactions above ₹2,000 account for approximately 4 percent of person-to-merchant (P2M) transaction volume but 67 percent of transaction value. This concentration provides a rationale for charging higher-value payments while leaving most merchant transactions untouched.
The threshold's economic rationale, however, does not establish whether the design will work as intended. That depends on how merchants and customers respond to the charge.
Who Pays for a Payment System?
Although merchants are not permitted to pass MDR directly on to customers, they may absorb the cost through lower margins, adjust broader pricing or discount strategies, or encourage alternative payment methods. Larger retailers may have greater scope to distribute costs across their operations, while businesses with thinner margins and limited pricing flexibility may face tighter constraints.
For a merchant earning a 5 percent profit margin on a sale, a 0.4 percent MDR would consume 8 percent of that profit if fully absorbed. At a 2 percent margin, the charge would consume 20 percent. The framework provides a flat ₹5 charge for specified essential and thin-margin sectors, a lower rate for capital-market transactions, and a ₹300 cap on standard-rate transactions of ₹75,000 or more. Nevertheless, other businesses with narrow margins may still face significant pressure.
The revenue yield will also depend on whether merchants steer customers towards cards, bank transfers or cash. Such responses will reflect the relative costs and convenience of alternative payment methods, as well as the competitive conditions facing individual businesses.
What the Revenue Estimates Leave Open
Reserve Bank of India Governor Sanjay Malhotra has argued that the charge is unlikely to materially affect overall UPI volumes. That does not settle the revenue question. Goldman Sachs estimates that nearly 48 percent of annualised P2M transaction value would qualify for the full 0.4 percent charge, implying a potential annual revenue pool of approximately ₹20,600 crore based on August 2026 transaction levels.
Actual collections would depend on exemptions, differentiated rates, transaction caps and merchant and customer responses. If higher-value transactions migrate away from UPI, the revenue base could contract. Aggregate UPI transaction counts might continue to rise even as its position in higher-value merchant payments weakens.
The distinction matters because the purpose of MDR is not merely to preserve transaction volumes, but to generate sufficient revenue to support the payments infrastructure without undermining its widespread acceptance.
When a Threshold Changes Behaviour
The ₹2,000 threshold may create an incentive to split payments rather than switch away from UPI. If the standard 0.4 percent charge applies to the entire transaction once it exceeds ₹2,000, a ₹4,000 purchase would attract a fee of ₹16, while two separate payments of ₹2,000 each could avoid the charge if assessed independently under the applicable rules. Whether such splitting would be permitted remains an important implementation question. It could nevertheless preserve UPI usage while reducing MDR collections, making aggregate transaction counts an incomplete measure of the policy's effects.
Policymakers should therefore track the volume and value of payments above ₹2,000 against trends in competing payment methods, rather than rely on aggregate UPI growth or MDR collections alone. They should also monitor whether transaction values cluster just below ₹2,000 after implementation. A rise in repeated payments to the same merchant over short intervals, alongside such clustering, could provide stronger evidence that the threshold is influencing payment behaviour.
The stated purpose of MDR also creates an accountability requirement. Policymakers should disclose how collections are distributed among payment ecosystem participants and assess whether the resulting revenue contributes to measurable improvements in system uptime, transaction success rates, dispute resolution and merchant support. The framework also commits an amount equivalent to 5 percent of MDR collections to a dedicated fund for expanding UPI adoption among small merchants. Its allocation and outcomes should be reported transparently.
These findings should inform any future adjustment to the MDR rate, threshold and exemptions. The test is not simply whether the charge raises revenue, but whether it strengthens the payments ecosystem without imposing disproportionate costs or encouraging avoidable changes in payment behaviour.
UPI's first challenge was persuading a country to trust a new way of paying. Its next one is quieter but harder: charging for that trust without spending it.