Free UPI payments may not remain entirely free in the future. The government has proposed changes to the law that could allow merchant charges on certain high-value UPI transactions, although no fee has been introduced yet.
The proposal is part of amendments to the Payment and Settlement Systems Act introduced in Parliament by Finance Minister Nirmala Sitharaman. If passed, the changes would give the government the authority to levy merchant fees on UPI transactions at a later stage.
UPI, one of the world's largest real-time payment systems, processes billions of transactions every month. According to official data, around 23.7 billion UPI transactions worth nearly Rs 29.9 lakh crore were recorded last month.
1. What does the proposed law say?
The proposed amendment is included in changes to the Payment and Settlement Systems Act and the Taxation and Other Laws (Amendment) Bill.
The amendment would enable banks and payment service providers to collect a Merchant Discount Rate (MDR) on notified electronic payment modes.
According to a Reuters report, the legislation would only create the legal framework for imposing such charges. It would not immediately introduce MDR on UPI payments but would empower the government to do so in the future if required.
2. What fee is being considered?
According to the report, one proposal under discussion is to impose an MDR of 0.3 per cent to 0.5 per cent on UPI transactions above Rs 2,000 made to merchants with an annual turnover exceeding Rs 1.5 crore.
This means the fee, if introduced, would apply only to eligible merchants and only on transactions above the specified threshold.
Another option being examined is to base the fee on a merchant's annual turnover instead of individual transaction values. The government is also considering setting an upper limit on the amount that can be charged.
3. Why is the government considering this?
Payment companies and industry stakeholders have long argued that the current zero-MDR model makes it difficult to operate sustainably.
Since service providers do not earn revenue from processing UPI transactions, they contend that it limits their ability to invest in technology, strengthen payment infrastructure and expand digital payment services.
A limited MDR on higher-value transactions is being explored as a possible way to support the long-term sustainability of India's digital payments ecosystem.
4. Who would pay the fee?
If implemented, the MDR would be paid by merchants to banks and payment service providers for processing digital transactions.
Current proposals indicate that the charge would primarily affect larger businesses rather than small shops or neighbourhood retailers. Consumers are not expected to be charged directly.
Merchants already pay MDR on card transactions. Credit card payments typically attract an MDR of around 1.5 per cent, with charges reaching up to 3 per cent in some cases, while debit card transactions generally carry lower fees.
5. What does this mean for consumers?
At present, the proposed amendment only creates the legal provision for merchant charges and does not impose any fee.
For individuals using UPI for personal payments such as grocery shopping, food delivery or cab bookings, there is no immediate change.
Reports suggest that any future fee would target a relatively small share of transactions that account for a significant portion of the total transaction value. Government estimates indicate that transactions above Rs 2,000 make up about 5 per cent of all UPI transactions but account for nearly 65 per cent of the overall transaction value.
As a result, most UPI payments are unlikely to be affected even if the proposal is implemented. It is also uncertain whether large merchants would pass on any additional costs to consumers.
