₹20,700 Crore UPI Problem: Why Govt Is Considering Merchant Charges Again

The Department of Financial Services (DFS) is evaluating two strategies to manage the operational costs of the Unified Payments Interface (UPI), the Finance Ministry informed the Parliamentary Standing Committee on Finance.

The department may restore the merchant discount rate (MDR) for high-value transactions or introduce a tiered incentive system to gradually remove government funding.

Finance Minister Nirmala Sitharaman said in the Rajya Sabha on Monday that consumers will continue to use UPI free of charge. Future fees will apply exclusively to a limited category of high-threshold merchant transactions.

The Parliamentary Standing Committee on Finance, chaired by Lok Sabha member Bhartruhari Mahtab, tabled its report on Wednesday, August 12, 2026.

The DFS informed the panel in a July 17 reply "Given the sustainability of the UPI ecosystem and the burden on the Government exchequer, the Department is currently exploring two options: (i) Examining the feasibility of restoring MDR for certain high-threshold transactions/merchants; and (ii) A tiered incentive structure to phase out the government support in the next few years"

Addressing Funding Shortfalls

The current state budget sets aside Rs 2,000 crore to subsidise UPI transactions and offset zero-MDR losses.

This allocation falls far short of the estimated Rs 20,700 crore required by the payment industry to cover annual operational expenses.

Government incentives account for merely 11 per cent of these actual costs and 14 per cent of potential MDR collections, according to the report.

UPI networks are on track to process 150 billion transactions monthly and integrate 600 million new users.

"While statutory enablement now exists to permit calibrated MDR on high-value transactions, any delay in notifying and operationalising this framework leaves payment service providers heavily dependent on inadequate subsidies, thereby threatening critical investments in cybersecurity, fraud prevention and network infrastructure," the committee stated in its report.

Finding a self-sustaining funding model remains an immediate priority.

"The committee would like to emphasise that establishing a viable revenue mechanism is critical to ensuring the UPI ecosystem achieves financial sustainability without perpetually straining the government exchequer," the committee stated.

Proposed Regulatory Framework

Parliament approved the Taxation and Other Laws (Amendment) Bill, 2026, earlier this week to modify the Payment and Settlement Systems Act, 2007. This legislative amendment enables the Centre to offer selective statutory protection from charges for designated electronic payment methods. The government has yet to permit the levy of MDR.

Policymakers introduced the zero MDR mandate on all UPI transactions in January 2020 to accelerate digital-payment adoption. Prior to this policy shift, UPI merchant transactions in India incurred an MDR of up to 0.30 per cent of the transaction value until 2019.

The UPI and Services Steering Committee, headed by the National Payments Corporation of India (NPCI), will dictate the upcoming MDR structure. The panel will also set the exact transaction threshold that triggers the levy.

Central authorities maintain that any future MDR will remain nominal and apply only to a limited set of merchant transactions. These fees will sit significantly lower than the standard charges applied to debit and credit cards.