Government eyes UPI merchant charges on payments above Rs 2,000

New Delhi: India’s free ride on UPI could soon come with a small fare, at least for bigger merchants.

According to a Reuters report, he government has taken the first legislative step towards allowing merchant fees on Unified Payments Interface (UPI) transactions after introducing amendments to the Payment and Settlement Systems Act in Parliament on Tuesday.

The proposed changes, tabled by Government of India finance minister Nirmala Sitharaman, would create the legal framework for introducing a merchant discount rate (MDR) on digital payments. However, no decision has yet been taken on whether the fee will be implemented, how much it will be, or which transactions it will cover.

UPI, one of the world’s largest real-time payment systems, processed 23.6 billion transactions worth Rs 29.9 trillion in July, according to official data. The platform is dominated by PhonePe, backed by Walmart, and Google Pay, owned by Alphabet.

The absence of merchant fees has long been a point of contention for payment companies, which argue that the zero-MDR policy has made it difficult to generate revenue and invest in expanding the digital payments ecosystem.

A merchant discount rate is a fee that merchants pay to banks and payment service providers for processing digital transactions. While credit card transactions in India typically attract an MDR of around 1.5 per cent and debit cards up to 0.9 per cent, UPI payments currently do not carry any such charge for merchants.

According to industry and regulatory sources, policymakers are evaluating two possible models for introducing MDR. One would apply fees only to transactions above a specified value, while the other would base charges on a merchant’s annual turnover.

One proposal under consideration would impose an MDR of between 0.3 per cent and 0.5 per cent on UPI transactions exceeding Rs 2,000 for merchants with annual turnover of more than Rs 1.5 crore. Smaller businesses and consumers would continue to enjoy free UPI payments under the proposal.

A report by Jefferies noted that although transactions above Rs 2,000 account for only around 4 per cent of merchant payment volumes, they represent roughly 67 per cent of the total transaction value, making them a potential starting point for any fee regime.

The finance ministry, the Reserve Bank of India and the National Payments Corporation of India had not commented on the proposal at the time of reporting.

If approved, the amendment would mark the biggest policy shift in India’s UPI ecosystem since the government introduced zero merchant fees, potentially reshaping how digital payments are funded while seeking to preserve free access for consumers and small businesses.