Unified Payments Interface (UPI) has become an integral part of everyday payments in India, allowing people to transfer money instantly without paying a transaction fee. Launched in April 2016 by the National Payments Corporation of India (NPCI), UPI began with 21 banks and recorded just 373 transactions in its first month. By May 2026, the system had expanded to 720 banks and processed 23.20 billion transactions worth Rs 29.90 lakh crore, highlighting how rapidly digital payments have become embedded in daily life.
The convenience of UPI has also transformed payments for small businesses. A simple QR code allows merchants, including roadside vendors and small retailers, to accept digital payments without the infrastructure traditionally associated with card transactions. A 2026 assessment by the Department of Financial Services found that 94% of surveyed small merchants accepted UPI, while 57% said digital payments had increased their sales. The same assessment showed that 57% of surveyed users preferred UPI, underlining its role in making even low-value transactions digitally viable.
However, the widespread use of UPI comes with significant costs for banks, payment companies, technology providers and the infrastructure supporting authentication, fraud monitoring and settlement. Under the existing zero-Merchant Discount Rate (MDR) model, merchants generally do not pay a transaction fee for UPI payments, with the government providing financial support to sustain the ecosystem. The Department of Financial Services has said budgetary support under the incentive scheme has totalled Rs 8,276 crore. RBI Governor Sanjay Malhotra has also pointed out that the absence of a consumer fee does not mean UPI itself is costless, with government support helping cover the wider expenses.
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The debate has intensified following a legal change that enables charges to potentially be introduced for certain digital-payment transactions. Finance Minister Nirmala Sitharaman has clarified that consumers will not be charged for UPI transactions and that no final MDR framework has been decided. Reports have discussed a possible MDR of around 0.3% to 0.5% on certain UPI transactions above Rs 2,000 involving large merchants, although the exact rate, threshold and exemptions remain undecided. The proposed approach is intended to protect small-value payments while potentially asking larger commercial transactions to contribute towards the cost of maintaining the payment infrastructure.
The question of whether merchant charges could eventually affect consumers remains more complicated. A merchant could absorb the additional cost, negotiate with its payment provider or pass some of it on through pricing, depending on competition and margins. However, an MDR would not automatically mean higher prices for customers. The larger issue is how revenue is distributed among banks, payment providers and other participants in an ecosystem where UPI itself has traditionally generated little direct transaction revenue. For payment applications, the platform has instead often served as a gateway to other financial and merchant services.
After a decade of rapid expansion, UPI now processes billions of transactions every month and accounts for a dominant share of India's digital-payment activity. Its success has largely depended on making payments simple, inexpensive and almost invisible to users. The challenge for policymakers is therefore to create a sustainable funding model without undermining the affordability and accessibility that made UPI successful. For now, consumers can continue using UPI without a transaction fee, while the government considers how large merchants and other participants could contribute to maintaining India's digital-payment infrastructure.
Also Read: Sitharaman Says UPI Merchant Discount Rate Won't Affect Customers