UPI charges debate grows as rising costs put payment ecosystem under pressure

The recent amendment to the Payment and Settlement Systems Act (PSS Act) has triggered debate over whether users could eventually be charged for making UPI payments. The Finance Ministry, however, has clarified that the amendment does not seek to impose charges on ordinary users.

“The recent amendment to the Payment and Settlement Systems Act (PSS Act) has generated debate, with some misinterpreting it as a move to impose charges on ordinary users. In reality, the amendment is an enabling provision designed to ensure UPI’s long-term sustainability, technological advancement, and resilience against emerging risks,” the Finance Ministry said on August 8, amid speculation that charges could be imposed on UPI transactions.

The debate comes at a time when banks and payment service providers have repeatedly raised concerns over the rising cost of maintaining and operating digital payments infrastructure.

The Standing Committee on Finance, in a report released in March, noted that the “absence of MDR makes the UPI ecosystem financially unsustainable”.

MDR, or Merchant Discount Rate, is generally charged to merchants by banks and payment service providers for processing digital transactions. Typically ranging between 1% and 3% for debit and credit card transactions, the fee helps cover transaction processing, settlement and infrastructure costs.

However, UPI transactions and RuPay debit card payments have had no MDR since January 2020, a policy introduced to encourage the rapid adoption of digital payments across India.

With merchants not paying MDR on UPI transactions, the government has been supporting the ecosystem through an incentive scheme for small merchants.

Under the ‘Incentive Scheme for Promotion of RuPay Debit Cards and low-value BHIM-UPI Transactions (P2M)’, the government provides incentives for UPI payments of up to ₹2,000 made to small merchants. The incentive is capped at 0.15% of the transaction value, while large merchants are excluded from the scheme.

The financial burden of supporting the system has continued to grow.

The Union Budget for 2026-27 estimated the subsidy payout under the scheme at ₹2,000 crore for the current fiscal year. In 2025-26, the government paid ₹2,196.21 crore in subsidies, compared with ₹1,922.77 crore in 2024-25.

At the same time, the payments industry has been shouldering a much larger annual cost. The Finance Ministry’s Department of Financial Services told the Standing Committee on Finance earlier this year that the industry was incurring an estimated annual cost of ₹20,700 crore for person-to-merchant transactions.

This wide gap between government support and the actual cost of running the system has intensified the debate over whether the existing zero-MDR model can remain financially sustainable as UPI continues to expand.

According to reports, an MDR of around 0.4% could be considered for high-value person-to-merchant UPI transactions.

Any such move, however, would represent a significant shift in the economics of UPI, even as the government maintains that ordinary users should not be burdened with transaction charges.

For now, the central question is not simply whether UPI payments will remain free for consumers, but how the ecosystem can sustainably fund the technology, infrastructure and security needed to support one of the world’s largest digital payment networks.