UPI transactions above Rs 2,000 may face fees under proposed amendment

India’s zero-cost UPI payments framework could be set for its most significant policy shift in years. Amendments to the Payment and Settlement Systems Act introduced in Parliament would create a legal basis for levying merchant charges on selected UPI transactions. Although no fee has been imposed yet, the change would enable the introduction of a Merchant Discount Rate (MDR), long sought by the payments industry to sustain ecosystem growth.

The amendment, presented by Finance Minister Nirmala Sitharaman, does not immediately introduce charges. Instead, it provides the legal backing for the government to impose MDR at a later stage if it chooses. A Reuters report indicates that officials are still deliberating on the structure and scope of any such fee, with no final decision on rates or coverage.

One proposal under review suggests levying an MDR of 0.3 percent to 0.5 percent on UPI transactions exceeding Rs 2,000. The charge would likely apply only to merchants with annual turnover above Rs 1.5 crore, meaning consumers would not bear additional costs and small businesses could remain exempt.

Another approach being examined involves linking the MDR to a merchant’s annual turnover rather than individual transaction values. Policymakers aim to ensure that, if introduced, the fee primarily impacts larger enterprises rather than small neighbourhood retailers.

MDR is a processing fee merchants pay to banks and payment service providers for handling digital payments. While card transactions already attract such charges — typically around 1.5 percent for credit cards and lower for debit cards depending on the bank and network — UPI transactions have so far remained exempt, contributing to their widespread adoption.

Rationale behind the proposal

Industry leaders have consistently argued that offering UPI services without merchant fees makes it difficult to sustain viable business models. Without revenue from transaction processing, companies say they face constraints in investing in technology upgrades, strengthening infrastructure, and expanding offerings. A limited MDR on high-value transactions, they contend, could support the long-term development of India’s digital payments landscape.

The proposal comes amid record-breaking growth in UPI usage. Official figures show that in July alone, the platform processed 23.6 billion transactions worth Rs 29.9 trillion, cementing its position as one of the world’s largest real-time payment systems. Platforms such as PhonePe and Google Pay continue to dominate usage nationwide.

Although transactions above Rs 2,000 account for only a small proportion of overall merchant UPI volumes, they represent a substantial share of total transaction value. Jefferies estimates that such payments make up about 67 percent of the value processed through merchant UPI while constituting just 4 percent of transaction volume. The brokerage suggests that applying MDR to this segment could unlock annual revenues of Rs 5,000 crore to Rs 10,000 crore for the digital payments industry, benefiting companies like Paytm and Pine Labs.

For now, the amendment merely provides an enabling legal framework. The government has yet to confirm whether MDR will be introduced, at what rate, or from when. Until a formal decision is announced, UPI transactions will remain free under the current regime.