by Sri Varshith Kumar Reddy E
Six years after UPI’s zero-MDR regime began, India is debating whether the world’s largest instant payment network can remain free without an ever-growing public subsidy.
UPI Debate
Parliament passed the Taxation and Other Laws (Amendment) Bill, 2026, on August 4. The bill repeals the six-year-old bar on charging a Merchant Discount Rate (MDR) on UPI transactions. Nothing changes yet. No fee exists. But the legal wall that made UPI zero-cost by statute is gone, triggering the biggest debate on digital payments policy since UPI’s zero-MDR mandate came into force in January 2020.
The Finance Ministry moved quickly to calm concerns. Consumers will not pay anything, officials have clarified. Small merchants with turnover below roughly Rs 1.5 crore will remain exempt. Any future MDR would apply only to a narrow category of large-merchant transactions above Rs 2,000, at a rate between 0.25 per cent and 0.5 per cent, far below the 1.5-2 per cent that credit cards routinely charge. The NPCI-led UPI and Services Steering Committee will decide the actual framework after the law is notified through a Gazette order and RBI guidelines.
The reassurance has not stopped a sharper argument over why the bill appeared now and who it really serves.
National Picture
UPI has processed roughly 20 billion transactions a month, at a run rate approaching Rs 25 lakh crore, according to NPCI data cited in recent reporting. It handles around 80 per cent of India’s retail digital payment transactions.
A payment network of this scale, run at zero cost to both sides, was never going to stay outside a serious policy conversation forever. What forced the issue in August 2026 was a mix of fiscal pressure and external pressure.
The government has run an incentive scheme since 2021-22 to compensate banks and payment firms for handling UPI transactions for free. The scheme has paid out roughly Rs 8,276 crore in cumulative budgetary support through FY 2024-25, with a peak disbursement of Rs 3,631 crore in FY24 alone.
The Union Budget for FY27 trimmed the outlay to Rs 2,000 crore, even as transaction volumes continued to climb. Payment executives say the subsidy barely covers a tenth of their actual costs. Upasana Taku, co-founder of MobiKwik, recently estimated that subsidies received so far cover only 10-11 per cent of what banks and fintech firms actually spend on running the system.
Layered on top of this fiscal squeeze is a trade dispute. The US Trade Representative classified India’s digital payments policies as a foreign trade barrier in March 2026, arguing that the zero-MDR mandate disadvantages Visa and Mastercard while favouring UPI and RuPay.
That timing, arriving as Washington pushed India on a broader trade deal, has fed a narrative that the bill is capitulation to American pressure rather than domestic reform. GTRI, the trade research group, has warned that India must not rewrite UPI policy to please Washington.
The Cost Question
The distinction matters. A UPI transaction is not free to produce. Someone pays for servers, fraud checks, customer support and settlement infrastructure every time a payment clears.
For six years, that someone has been the taxpayer and the banking system, absorbing costs that private card networks recover through merchant fees. This was defensible when UPI was young and needed a runway to reach critical mass. It becomes harder to defend when UPI already dominates the market and continues to grow at double-digit rates.
If India reintroduces MDR, it should do so because the current model asks banks and payment companies to run a systemically important utility at a loss indefinitely, not because a foreign government objected to a level playing field for its card networks.
UPI’s entire competitive advantage over cards was one number: zero.
Zero fee to the customer, zero fee to most merchants and zero friction at the point of sale. That number helped a fruit vendor in Srinagar or Anantnag start accepting digital payments without a POS machine or a merchant contract.
Strip that away, even partially, and the psychological core of why UPI won is touched.
The maths behind sustaining that zero is now the difficult part. NPCI and the banking system currently absorb the processing cost of tens of billions of monthly transactions, funded through a shrinking budget line and cross-subsidies from other banking businesses.
Industry estimates of the true annual cost of running UPI at scale, once server load, fraud prevention, dispute resolution and settlement risk are counted, run into tens of thousands of crores when scaled across the network’s full transaction base.
Whatever the precise figure, the direction is clear: volumes have grown far faster than the subsidy meant to cover them. The gap has to close somehow — through the exchequer, merchants or a hybrid that spreads the cost.
Kashmir Impact
Jammu and Kashmir offers a useful lens on what is at stake because UPI’s growth there tracks a genuine financial inclusion story rather than just an urban convenience story.
UPI transaction value in the union territory rose from Rs 37,511 crore in 2022-23 to Rs 40,289 crore in 2023-24, growing faster than any other digital payment mode in the region.
J&K Bank alone processed over four crore UPI transactions worth more than Rs 3,125 crore across just four days around Eid this year.
In Rajouri, a recent survey found 75 per cent of street vendors now use UPI, with 94.3 per cent transacting digitally at least occasionally. The adoption has been driven explicitly by UPI’s zero-cost model and its integration with schemes such as PM-SVANidhi.
This is precisely the population an MDR threshold is designed to protect, and precisely the population most vulnerable if the threshold slips over time.
Kashmir’s informal economy has historically had thin or absent credit histories. Every UPI scan now creates a transaction record that can eventually support a loan application, a point local bankers have made explicitly.
But the region also shows a stark urban-rural divide. Mobile connectivity reaches 94 per cent of J&K’s villages, yet only 11.9 per cent of rural households transact online compared to 32.4 per cent of urban households.
Small retailers in Srinagar are already anxious about margin pressure from quick-commerce entrants such as Blinkit. Adding even a distant prospect of transaction fees, however small and however exempted today, risks reinforcing caution among a merchant base that only recently gained confidence in digital payments.
The businesses most anxious about the shift sit in the middle: not small enough to stay exempt, but not large enough to absorb a new cost line without pain.
Retailers, restaurant chains and e-commerce sellers with turnover between Rs 1 crore and Rs 50 crore are among those most exposed to a threshold-based MDR. Payment aggregators and fintech firms are simultaneously watching their own margins.
Many have built business models assuming UPI acceptance stays a zero-cost customer acquisition tool. A fee, even a modest one shared across the value chain, would force payment companies to recalculate unit economics that have held steady since 2020.
## What Next
UPI cannot remain a permanent public subsidy at ever-rising scale, and pretending otherwise only delays a harder reckoning.
The government has, for now, drawn a sensible line: protect consumers and small merchants while opening a narrow, transparent channel for the network to fund itself where the market can bear it.
That line will only hold if the threshold stays credible, the rate stays nominal and the process remains insulated from trade-deal horse-trading.
The real test comes when the Steering Committee sets an actual number. If calibrated well, mid-market businesses could absorb a manageable cost, banks could get a sustainable revenue stream, and the network’s core promise to ordinary users and small vendors, from Lal Chowk to any village market, could remain intact.
If it drifts, even slightly, towards the mass of small merchants who built UPI’s reach in the first place, the very inclusion story that made UPI a global model for digital payments could start to unravel.
India built something the world watched and copied. Keeping it solvent without breaking what made it work is now the real policy challenge.
(The author is a pracademic working on government policy and public institutions. Ideas are personal.)
