With the passing of the Taxation and Other Laws (Amendment) Bill 2026, intended to enable the levy of a merchant discount rate (MDR) on UPI-based payments, opinion remains divided on whether such payments should forever remain free or not. According to Business Standard, the law is currently a mere enabler, and the assumption is that users will never have to pay anything for payments via the Unified Payments Interface or UPI. Those in favour of MDR suggest that ultimately someone has to pay for the expenses incurred in maintaining the UPI infrastructure, but others point out that this will in effect make UPI costlier for higher-value payments as merchants may ultimately pass this cost on to users. The costs involved are estimated to be between ₹10,000 crore and ₹20,000 crore annually, with some industry estimates putting the cost at ₹0.40-₹1 for a single UPI transaction, especially when adding cybersecurity investments in the age of artificial intelligence-led frauds. However, Business Standard notes that the wider economic and social benefits of free digital payments far outweigh their estimated costs, as UPI reduces the need to print and handle cash, improves money flow traceability, enables precise payments, and strengthens India's sovereign payments infrastructure.
A Parliamentary panel has called for the early rollout of a calibrated Merchant Discount Rate (MDR) on high-value digital transactions, according to the latest parliamentary report tabled in Parliament. The Standing Committee on Finance, chaired by senior BJP leader Bhartruhari Mahtab, has urged the Department of Financial Services under the Ministry of Finance to expedite the implementation of a self-reliant, tiered revenue framework for higher-value merchant transactions. The committee emphasized that the framework is essential to make the payments ecosystem financially viable and reduce the government's subsidy burden, acting on earlier recommendations highlighting the need for a sustainable revenue model. The panel noted that any delay in notifying and implementing the framework would leave payment service providers reliant on inadequate government support, potentially affecting investments in cybersecurity, fraud prevention and payment network infrastructure. The committee's proposal comes amid growing concerns over the ₹2,000 crore government allocation versus the industry's estimated operational cost of ₹20,700 crore, creating a significant funding gap that threatens long-term ecosystem sustainability.
The Department of Financial Services (DFS) has confirmed to the Parliamentary Standing Committee on Finance that it is examining the feasibility of restoring MDR for 'certain high-threshold transactions/merchants' and a tiered incentive structure that would phase out government support over the next few years. According to the latest parliamentary response dated July 17, the government is considering a nominal charge on selected digital payment transactions involving consumers and small businesses, while creating a sustainable revenue framework for banks, payment service providers and payment infrastructure companies. However, the exact transaction threshold and MDR rate are yet to be finalised, with the UPI and Services Steering Committee headed by the National Payments Corporation of India (NPCI) deciding the structure of any MDR and the threshold above which transactions could attract the fee. The government has indicated that any such levy would be nominal and substantially lower than the MDR applicable to debit and credit card transactions, ensuring that ordinary UPI transfers between individuals remain free while protecting small merchants and P2P payments. As per Business Standard, Rohan Lakhaiyar from Grant Thornton Bharat noted that a calibrated MDR framework could potentially create a larger recurring revenue pool for UPI participants than the current incentive structure.
Razorpay CEO Harshil Mathur has joined PhonePe founder and CEO Sameer Nigam in publicly supporting the government's commitment to maintaining free UPI payments for consumers. This unified industry stance comes as the Ministry of Finance officially confirmed on August 8 that UPI payments will continue to remain free for consumers, while any future merchant discount rate (MDR) would be limited to specified merchant transactions above a threshold. As per the official statement, the government emphasized that any such levy would be nominal and substantially lower than the MDR applicable to debit and credit card transactions. This clarification comes amid debate over the proposed amendment to the Payment and Settlement Systems Act, 2007, which the government has described as an enabling provision aimed at supporting the long-term sustainability of the Unified Payments Interface ecosystem. The panel has now urged the government to move quickly on the tiered MDR framework, particularly for higher-value merchant transactions, while ensuring that small merchants and P2P transfers continue to have access to zero-cost digital payments.
The UPI ecosystem has demonstrated remarkable growth, processing 2,366 crore transactions worth ₹29.9 lakh crore in July 2026 alone. As per the government's official statement, UPI has grown into a central part of India's retail payments ecosystem, enabling real-time interoperable transfers across banks and payment applications. The payments system is also expanding internationally, with UPI currently live in 11 foreign countries, while several other countries have expressed interest in adopting or integrating with the platform. The committee noted that while UPI is expected to process up to 150 billion transactions per month and add 600 million new users, the current government incentive covers merely 11% of the industry's actual costs and 14% of potential MDR collections, creating a structural funding gap which is impacting long-term infrastructural investment. The government has positioned wider rural and semi-urban adoption as an important part of UPI's next phase of growth, maintaining that affordability while strengthening infrastructure, security and competition will be key to that expansion. UPI transactions have carried zero MDR since January 2020, when the government abolished the charge to accelerate digital payments and encourage a shift from cash to electronic transactions. Before that, an MDR of up to 0.30 per cent applied to UPI merchant transactions. The UPI ecosystem has been supported through a combination of RBI's Payments Infrastructure Development Fund (to subsidise the deployment of payment acceptance infrastructure in Tier-III -VI cities) and government incentives to compensate for the zero-MDR regime.
