₹20,700 Crore UPI Cost vs ₹2,000 Crore Budget: Govt Rethinks Payment Model

The Department of Financial Services (DFS) is considering a tiered incentive mechanism to gradually withdraw government support for the Unified Payments Interface (UPI) ecosystem over the coming years, while also examining the possibility of reintroducing the merchant discount rate (MDR) for select high-value transactions or merchants.

The proposals are aimed at improving the financial sustainability of UPI, according to the DFS's response to the Parliamentary Standing Committee on Finance, as reported by Moneycontrol.

The committee, chaired by Bhartruhari Mahtab, submitted its 44th Report to the Lok Sabha on August 12, highlighting a significant gap between the government's budgetary allocation for UPI incentives and the industry's estimated cost of processing transactions.

Government Support Falls Short Of Industry Costs

The government has allocated ₹2,000 crore for FY27 under its incentive scheme for promoting RuPay debit cards and low-value BHIM-UPI person-to-merchant transactions.

However, the allocation is substantially lower than the estimated ₹20,700 crore cost incurred by the industry to process UPI transactions.

The estimate is based on an average cost of ₹1.38 per transaction and around 15,000 crore person-to-merchant transactions recorded during the previous year.

UPI transactions currently operate under a zero-MDR framework, meaning merchants are not charged a fee for accepting payments through the platform.

The government compensates payment ecosystem participants through incentives to offset some of the costs associated with these transactions.

Two Models Being Considered

The DFS said it is examining two possible approaches to reduce the burden on the government exchequer.

The first involves bringing back MDR for certain high-value transactions or categories of merchants. The second would introduce a tiered incentive framework that would progressively reduce government support over the next few years.

The department has not yet specified the transaction-value thresholds, merchant categories or timeline that would determine the proposed MDR structure or withdrawal of incentives.

The Standing Committee has also called for the development of a self-sustaining, tiered revenue model for UPI.

It recommended protecting small merchants and person-to-person transactions while exploring revenue generation from higher-value merchant payments.

Cybersecurity Investment At Risk

The committee cautioned that the wide gap between the ₹2,000 crore budget allocation and the industry's estimated ₹20,700 crore cost could leave payment service providers dependent on insufficient government support.

It warned that inadequate funding could affect investments in cybersecurity, fraud prevention and payment-network infrastructure, potentially creating risks for the rapidly expanding digital payments ecosystem.

The committee also noted that legislative provisions enabling a tiered MDR framework have already been introduced.

Why UPI Has Zero MDR

UPI person-to-merchant transactions were previously subject to an MDR of up to 0.30% of the transaction value. The government abolished MDR from January 2020 to accelerate digital-payment adoption and encourage consumers and merchants to move away from cash.

The latest proposals signal a possible shift from the blanket zero-MDR model towards a differentiated revenue structure, although the government has yet to announce any final decision.