UPI Charges: What Changes?

The government has clarified that users will not have to pay any charges for UPI transactions of up to ₹2,000. However, questions remain over whether charges could eventually be introduced for certain transactions above this limit, particularly those made by merchants.

The Centre recently notified changes to the Payment and Settlement Systems Act. The notification states that no bank or payment system provider can impose charges, directly or indirectly, on payments made through RuPay debit cards or UPI transactions of up to ₹2,000.

For ordinary UPI users, however, transactions above ₹2,000 will not automatically attract a fee. Finance Minister Nirmala Sitharaman had clarified in the Rajya Sabha on August 11 that the amendment does not introduce any tax or transaction charge on UPI users.

She also said that small merchants such as street vendors, cab drivers and kirana shop owners would not be required to pay charges simply because a customer makes a UPI payment. If any charges are introduced in the future, they would be applicable to merchants rather than the person making the payment.

The key issue behind the latest debate is the Merchant Discount Rate, or MDR. MDR is a small processing fee that a merchant pays to banks or payment service providers when a customer makes a digital payment.

UPI transactions have been exempt from MDR since 2020. The policy was introduced to encourage digital payments and reduce dependence on cash. As UPI usage has grown dramatically, however, banks, payment companies and the National Payments Corporation of India (NPCI) have argued that maintaining the system comes with significant costs.

These include spending on technology infrastructure, cybersecurity, fraud prevention and customer support. At present, these costs are largely borne by banks, payment apps and NPCI, with the government also providing annual incentives to banks to support the zero-MDR system.

The issue has therefore returned to the centre of discussions over the future financing of UPI. According to a Jefferies estimate cited by Hindustan Times, allowing merchant fees on larger UPI transactions could potentially generate between ₹5,000 crore and ₹10,000 crore annually for the industry.

UPI has become one of India's most widely used digital payment systems. In August alone, it processed 24.51 billion transactions worth ₹29.82 lakh crore, highlighting the enormous scale of the network.

The recent legislative change does not itself introduce MDR. Instead, it gives the government the power to permit such charges in the future.

The final decision on whether MDR should be introduced, and if so, which transactions would be covered and at what rate, has not yet been taken. Sitharaman had said that the UPI & Services Steering Committee, headed by NPCI and including major banks and leading UPI apps, would consider the issue.

For consumers, the immediate takeaway is simple: UPI payments up to ₹2,000 remain free, and payments above ₹2,000 do not automatically become chargeable. Any future merchant charges would require a separate decision on their scope and structure.