Pay a tea seller ₹40 over UPI and at least four businesses go to work for you. Your bank moves the money. The shop’s bank takes it in. A payment app carries the request across. NPCI’s switch runs the whole exchange, start to finish, in about two seconds. Every one of them spends something to pull this off — servers, staff, fraud checks — and not one earns a paisa from your payment.
That isn’t a flaw. It’s the design. A decision in January 2020 to strip the fee out of UPI is what turned it into the rail behind nearly 85% of India’s online transactions (BW Businessworld) — the shift we trace in how UPI changed the way business works in India. It’s also a decision the finance ministry’s own department, a parliamentary committee, and most of the payments industry now believe can’t last. When something this widely used is free, the cost doesn’t vanish. Someone is quietly carrying it — and the argument over who has already started.
The fee that vanished in 2020
Pay with a card and the shopkeeper hands over a small slice of the sale to the banks and network that processed it. That slice is the Merchant Discount Rate — usually a percentage of the bill, and the thing that funds card networks the world over.
UPI has an MDR ceiling too: NPCI allows up to 0.30% on person-to-merchant payments (PIB). But that ceiling sits switched off. Since January 2020 the government has zeroed MDR on UPI and RuPay debit transactions, writing it into law through amendments to the Payment and Settlement Systems Act and Section 269SU of the Income-tax Act (PIB).
The reasoning was straightforward, and it worked. Make acceptance cost a merchant nothing and every cart, kiosk, and corner shop will paste up a QR code. They did. What zeroing the fee didn’t do was zero the cost of running the thing. It only changed the question from “how much” to “who.”
So who pays?
Two parties, mostly.
Banks and payment providers absorb the bulk of it. Running UPI means servers, fraud monitoring, customer support, settlement systems, and a constant compliance bill — none of which earns a rupee under zero MDR. The finance ministry’s Department of Financial Services told a parliamentary committee exactly that: with no direct way to recover these costs, banks and PSPs end up eating them (Medianama).
The government picks up a slice. To soften the blow it runs an incentive scheme that reimburses banks for processing low-value BHIM-UPI payments to merchants. The money goes to the merchant’s bank first, then gets shared down the line — the customer’s bank, the PSP bank, the app (PIB). The rate works out to roughly 0.15% of value on eligible small-merchant payments up to ₹2,000 (IMP.NEWS).
The subsidy, year by year
The government’s cheque has lurched around, which is part of why nobody finds it reassuring:
- FY22: ₹1,389 crore
- FY23: ₹2,210 crore
- FY24: ₹3,631 crore
- FY25: ₹1,923 crore
- FY27 (budgeted): ₹2,000 crore — down nearly 10% from FY26’s revised ₹2,196 crore (BW Businessworld, Deccan Herald)
And here’s the number that keeps payments executives up at night: that subsidy covers only about 11% of what the industry actually spends to keep UPI running (Medianama). The other 89% is just swallowed.
Why the patience is running out
For years the banks and apps treated UPI as a loss leader — burn money on payments, win the customer, sell them a loan or a credit card later. That tolerance is fraying as volumes balloon and compliance costs climb.
The DFS didn’t hedge in its written submission: zero MDR, it said, has made the UPI ecosystem financially unsustainable, and the standing committee on finance recommended bringing back some form of MDR to give the system a real revenue base (Medianama). Industry voices have put it more bluntly still — without a commercial model, some firms will eventually be forced to walk away.
The payments industry’s own body has floated a specific fix: a 0.3% fee on merchant payments above ₹2,000, charged only to larger businesses with turnover over ₹20 lakh (IMP.NEWS). The same group had pushed for incentives north of ₹10,000 crore. The budget gave them a fifth of that.
There’s a catch nobody can ignore. Two apps already dominate UPI, and any fee structure risks entrenching them further — which is a big reason NPCI’s proposed 30% market-share cap keeps slipping its deadline.
Will you ever pay to use UPI?
Almost certainly not, if you’re a regular person buying tea. The structure everyone is arguing over is lopsided on purpose, and the lopsidedness is the whole point.
India has close to six crore merchants taking digital payments. Around 90% are small — turnover of ₹20 lakh or less — and only about 50 lakh are large (BW Businessworld). Every serious MDR proposal carves out those small merchants and low-value payments and aims squarely at the big ones. The chai vendor stays free. A national retail chain might pay a fee it won’t even feel.
For now the official line hasn’t budged: in mid-2025 the finance ministry flatly denied any plan to charge MDR on UPI and called the rumours baseless (NewsOnAir). Which leaves the honest answer somewhere uncomfortable — free today, with an unsettled fight over charging large merchants tomorrow, and a yearly scramble over how big the government’s cheque needs to be to hold the line.
Frequently Asked Questions
For person-to-person transfers and ordinary merchant payments, yes — no MDR, no fee to you or the shop. Banks, payment providers, and a government scheme carry the cost instead. A few edge cases (certain wallet loads, say) can attract small charges, but core UPI payments don’t.
No plan exists to charge ordinary users, and the finance ministry has said so publicly. The live debate is about a fee on large merchants for higher-value payments, with small merchants and everyday transactions left alone.
No. GST would attach to the MDR fee, and with no MDR on UPI there’s nothing for it to attach to (Tribune India).
