Full Breakdown
India Passes Legislation to Allow Merchant Fees on UPI Transactions
8/17/2026, 9:04:48 PM
Legislative Move to Permit Merchant Fees on UPI
The Indian Parliament has approved the Taxation and Other Laws (Amendment) Bill, 2026, amending the Payment and Settlement Systems Act, 2007 to remove the prohibition on charging a Merchant Discount Rate (MDR) for certain high-value business-to-merchant (B2M) transactions on the Unified Payments Interface (UPI). The bill creates a legal framework for banks and payment companies to levy fees on selected large-value merchant payments, while person-to-person (P2P) transfers will continue to be free for consumers. No specific MDR rate, transaction threshold, or implementation timetable has been announced.
Background of the Zero-Fee Model
Since its launch in 2016, UPI has operated under a zero-fee policy for all transactions, a strategy intended to accelerate digital adoption and reduce cash reliance. The model has been subsidized by the government, with the National Payments Corporation of India (NPCI) and participating banks bearing the costs of cybersecurity, infrastructure, and ongoing innovation. A recent parliamentary committee report indicated that state incentive schemes covered only about 11 % of the actual expenses incurred by the payment industry.
Scale of UPI Transactions
In the most recent fiscal year, UPI processed over 241 billion payments valued at roughly USD 3.3 trillion (approximately KES 429 trillion), serving 555 million active users. The volume has positioned UPI among the world’s largest real-time payment networks, surpassing global card operators in daily transaction counts.
Official Government Position
Finance Minister Nirmala Sitharaman emphasized that the legislative change will not impose taxes or transaction charges on ordinary UPI users. She framed the policy as a shift of cost recovery to large merchants that benefit from the frictionless system, aiming to ensure the long-term financial sustainability of the digital payments ecosystem. Government officials and the Reserve Bank of India (RBI) have reiterated that P2P transfers will remain free.
Potential Market Impact
Analysts note that the introduction of MDR could create a new revenue stream for banks and fintech firms, potentially improving margins for payment processors. However, they also warn that merchants may pass the fees onto consumers, possibly prompting a shift back to cash for high-value purchases if charges are perceived as excessive. Monitoring forthcoming RBI and NPCI circulars for the exact fee structure and thresholds will be critical for investors and stakeholders assessing the profitability and adoption trajectory of India’s digital payments landscape.
