UPI Fee Debate: MDR, Costs and Free Payments, Why UPI Charges May Be Needed?
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 #FinanceMinistry “categorically” clarified that UPI will remain free for citizens, with only a nominal fee possibly applying to certain merchants.
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 1st Jan 2020, the government has mandated zero MDR on UPI and RuPa
y 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 net banking, and
→ 3-4.5% on international credit cards.
For millions of Indians, UPI has become synonymous with instant and free digital payments. But behind every QR-code scan and bank transfer lies an ecosystem of banks, payment service providers, fintech companies and technology infrastructure that has to be continuously funded.
Even the RBI Governor Sanjay Malhotra made this point after the August monetary policy meeting. He argued that the cost is already being borne somewhere, often through the wider economy rather than as a visible charge on the person paying. His view is that a user-pays model, where those who use a service fund it, is one honest way to make that cost transparent instead of hiding it in the Budget.
The counter-view says UPI is now a public utility, like a road or a bridge, and public utilities are often funded by the state on purpose because the wider gains, in this case less cash, more tax visibility and faster commerce, are worth the public spending. On this reading, the subsidy is not a leak to be plugged but a deliberate investment.
Who Pays for UPI Today?
Currently Banks and payment processors absorb part of the cost and 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 subsidizes 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.
Read My Article: U
PI Fee Debate Explained: What the New MDR Law Actually Changes, and Who Might Pay. https://www.brajeshmohan.in/2026/08/upi-fee-debate-explained-what-new-mdr.html