Former NITI Aayog vice-chairman Rajiv Kumar has urged the government to keep UPI merchant payments free for a few more years, warning that even a small fee could push transactions back towards cash. His comments come after the government announced a 0.4% MDR on UPI merchant payments above ₹2,000 from October 15, 2026, while keeping consumer payments free. The Finance Ministry anticipates no rise in cash transactions following the UPI MDR implementation, stating that only a small percentage of total UPI volume will be affected by this new charge. The ministry will also monitor to prevent MDR burden transfer to consumers.
Under the revised framework effective October 15, 2026, person-to-merchant UPI transactions above ₹2,000 will attract a 0.4% merchant discount rate (MDR), capped at ₹300 and paid by the merchant, while transactions up to ₹2,000 will remain free. According to reports from Business Standard, more than 96% of shop payments by volume are below ₹2,000 and will continue to be free, but the 4% of transactions above ₹2,000 account for nearly two-thirds of total transaction value. For merchants processing 50 bills of ₹10,000 daily, this translates to a new cost of ₹2,000 per day or approximately ₹60,000 monthly. The 0.02% MDR will also impact specific mutual fund and broking transaction payments, with one-time investments in mutual funds and broker wallet replenishments subject to this fee, while recurring mutual fund SIPs via UPI AutoPay will remain exempt. However, small merchants classified under the person-to-person merchant framework, with UPI receipts of no more than ₹1 lakh a month, remain exempt from the new charges.
The fee changes address critical infrastructure and security challenges facing UPI's rapid growth. UPI processed 23.66 billion transactions in July alone, a record high, while the Reserve Bank of India mandated stricter authentication requirements in April, requiring at least two distinct authentication factors for every UPI transfer. Historically, UPI has experienced transaction failure rates of 15-30% during volume surges, with volumes expected to rise from 24 billion to 50 billion transactions within two years. The financial fraud risk indicator helped prevent ₹660 crore in fraud losses last year, as fraud detection moves from rule-based systems towards AI-driven models that can continuously learn new attack patterns. The ₹2,500 restaurant bill or ₹5,000 business payment would attract the new MDR charge, with revenue intended to fund infrastructure investments and cybersecurity improvements.
The fee changes pose substantial risks to the banking system's cost structure. According to Business Standard, Indian banks currently enjoy 40-45% Casa deposits at low cost, with UPI contributing significantly by making cash withdrawal unnecessary. Handling cash costs banks approximately ₹20-30 per transaction for operations including currency chest, sorting, storage, transport, security and ATM replenishment, with ATM replenishment alone estimated at ₹14-17 per withdrawal. The analysis suggests that if merchants nudge customers towards cash to avoid UPI fees, banks will lose low-cost Casa float and incur cash handling costs, creating a net loss to the banking system. However, NPCI will introduce a dedicated fund from MDR proceeds for small merchants, with eligible small merchants receiving under ₹1 lakh monthly remaining exempt from the new charges. The ₹20,000 crore annual estimate for UPI system maintenance costs is cited by the government's FAQ, though the calculation methodology and revenue allocation among various intermediaries remains undisclosed.
The fee changes have broader implications beyond banking costs, with concerns about equity in its effects on different income groups. As reported by Business Standard, UPI served as a medium to bring small traders into formal finance, and levy charges may drive small traders back to informal cash transactions. For the government, if currency circulation increases by just 1% of GDP due to UPI avoidance, it would mean approximately ₹3.5 trillion leaking out of bank deposits at current annual GDP levels. The analysis also notes that monetary transmission works better when money stays as deposits rather than cash, as cash operates outside interest rate influence, and UPI helps keep money in deposits by making cash withdrawal unnecessary. The ₹2,000 transaction threshold of MDR is intended to protect small consumers as more than 95% of all merchant transactions are in this bracket, but research shows that payment costs often reach consumers even when merchants are formally charged. The government is currently exploring options for restoring MDR on certain transactions, with the new framework supporting UPI's long-term sustainability and rural expansion efforts.
