For six years, UPI operated on a simple, powerful promise: free transactions for everyone. This fueled explosive growth, with the platform processing 2,366 crore transactions worth ₹29.9 lakh crore in July 2026 alone. But beneath this success story lay a growing economic crisis.
That's an 89% funding gap.
The era of completely free digital transactions via UPI may not last forever, RBI Governor Sanjay Malhotra signaled in July 2025.
This reality check has led to the Taxation and Other Laws (Amendment) Bill, 2026, which amends Section 10A of the Payment and Settlement Systems Act, 2007. The legislation doesn't impose charges directly but creates an enabling framework for the "UPI and Services Steering Committee," headed by NPCI, to introduce a nominal, threshold-based Merchant Discount Rate (MDR).
The proposed framework is surgical in its targeting. A 0.3% MDR would apply only to peer-to-merchant (P2M) transactions above ₹2,000. This threshold matters immensely because 86% of P2M transactions are below ₹500.
Person-to-person (P2P) transfers remain completely free.
This design protects the vast majority of merchants and consumers while capturing revenue from high-value commercial transactions. The government estimates this could generate ₹13,500–16,000 crore annually, covering 65–77% of the ecosystem's costs. Combined with the existing ₹2,000 crore government incentive, coverage could reach 87%.
The MDR pie won't be divided equally. Issuing banks (remitter banks) are positioned to capture 60–70% of the revenue. Before 2020, when UPI had an MDR, issuing banks received 70% of the revenue.
Other major beneficiaries include Bank of Baroda, HDFC Bank, Union Bank, and Punjab National Bank, each potentially earning ₹700–800 crore.
Fintech platforms face a more complex picture.
However, their roles as merchant acquirers and PSP partners matter. PhonePe and Paytm could earn around ₹700 crore annually from MDR, while Google Pay might generate ₹500 crore. Bernstein projects Paytm could see an EBITDA benefit of ₹1,320 crore in FY28, rising to ₹2,160 crore by FY30.
The ₹20,700 crore annual cost estimate isn't arbitrary—it reflects real investments in cybersecurity, fraud prevention, and network infrastructure that the current subsidy model cannot sustain. The Payments Council of India has warned that inadequate compensation threatens critical investments in these areas. A viable MDR pool means the economics of building and running infrastructure are finally recognized in the actual flow of funds, not just in NPCI circulars.
NPCI itself operates efficiently. The organization made ~₹1,500 crores in profits on ₹4,000 crores of revenue in 2024–25, with EBITDA margins above 50%. It costs just ₹500 crores to run the switch layer for UPI, IMPS, and NACH—the entire country's payments infrastructure. The actual cost per transaction comes to approximately ₹0.023 (2.3 paise). NPCI receives a fixed switching fee of around 0.02 basis points per transaction, separate from the bank interchange fees.
How merchants respond to the 0.3% fee will vary by category. Large merchants and e-commerce platforms process high volumes and can typically build even a modest MDR into pricing, or absorb it against thinner unit margins, the way they already do with card MDR. Around 99% of large merchants already accept cards and are accustomed to paying more than 1% in payment-processing costs. A UPI MDR of 25–30 basis points would be significantly lower.
Small merchants and kirana stores, operating on very thin margins, were part of the original constituency the zero-MDR push in 2020 was designed to protect, so they're likely to stay exempt. The proposed framework targets businesses with annual turnover above ₹1.5 crore, leaving roughly 90% of merchants accepting UPI untouched.
This creates competitive advantages for established players. PhonePe, Paytm, and Google Pay command a larger share of MDR collection due to their stronghold in merchant acquisition. Their dominance enables superior revenue-sharing agreements with banking partners, putting smaller platforms at a distinct disadvantage. Paytm is the largest player in the merchant acquiring side, followed by PhonePe.
The return of MDR after six years fundamentally alters market dynamics. During the zero-MDR era, success was measured by transaction volume rather than revenue. UPI was treated as a loss-leading acquisition funnel for other financial services. Now, volume alone doesn't guarantee monetization. Players that diversified beyond pure UPI have fared better.
For new entrants, MDR provides sustainable unit economics that reduce the need for cross-subsidization. However, established players possess formidable advantages: merchant networks with 2.5 crore monthly paying subscribers for payment-accepting devices, established PSP partnerships with favorable revenue sharing terms, and the data assets needed for cross-selling.
The government is evaluating two paths forward: restoring MDR for high-threshold transactions or implementing a tiered incentive structure to phase out government support over several years. The Parliamentary Committee has warned that any delay in operationalizing the MDR framework leaves payment service providers heavily dependent on inadequate subsidies, threatening critical investments.
India's UPI revolution is entering a new phase. The transition from a public utility funded by goodwill to an ecosystem where every layer gets paid for the value it creates represents a necessary evolution. The question now isn't whether UPI should remain free, but how to design a sustainable funding model that preserves the platform's transformative impact while ensuring its long-term viability.
