Who Pays for "Free" UPI? The Story Behind India's New Merchant Fee

Published by Prakashak Sunday, October 4, 2026

Part of our series on financial inclusion in India: the story behind each initiative, what works, and what doesn't.

Status as of 4 October 2026: The framework described below takes effect on 15 October 2026, and a challenge to it is pending in the Supreme Court. This is a fast-moving story, so we will add dated updates at the end of this post. We explain the positions of both sides and do not take one.

The scene

Imagine a shopkeeper who has stuck a QR code on the counter. Most of the day it collects small amounts: ₹20 for tea, ₹150 for groceries. On a festival weekend, a customer scans the same code to pay ₹3,500 for a pair of shoes.

For years, accepting both payments has cost the shopkeeper nothing. From 15 October 2026, the second one may no longer be free to accept, depending on the shop, the kind of business, and how much money the shop receives through UPI each month. The customer, officially, will still pay nothing.

That is the change at the centre of this post. It is small in rupees and large in principle: it is the first time since January 2020 that India's flagship public payments rail will charge a fee on a part of its merchant payments. It also raises an old question that every low-cost payment system eventually faces: if it is free to use, who pays for it?

What is changing, in plain language

The fee is called a merchant discount rate (MDR). It is the charge a merchant pays for accepting a payment, the way shops already pay a fee on card payments. According to coverage of the framework announced on 15 September 2026, the main elements are:

  • 0.4% MDR on person-to-merchant (P2M) UPI payments above ₹2,000, capped at ₹300 per transaction for payments of ₹75,000 and above.
  • No MDR on P2M payments up to ₹2,000.
  • A flat ₹5 for specified essential and low-margin sectors on payments above ₹2,000, such as railways, telecom, insurance and fuel.
  • 0.02%, also capped at ₹300, for payments into mutual funds, securities and through stockbrokers and dealers.
  • An exemption for small merchants receiving up to ₹1 lakh a month through UPI QR codes.
  • No charge on person-to-person (P2P) transfers, which are about 37% of UPI's transaction volume and about 70% of its value, whatever the amount.
  • No charge to consumers. The Ministry of Finance has said the MDR is neither a tax nor a charge collected by the government or NPCI, and banks have been directed to ensure merchants do not pass it on to customers.

The government says that almost 96% of merchant transactions stay unaffected, because they are either below ₹2,000 or covered by the small-merchant exemption.

Please treat the details above as a summary. The framework comes from the UPI and Services Steering Committee chaired by NPCI, with an NPCI circular and FAQ dated 15 September 2026. Read the originals at npci.org.in before relying on any figure.

The story behind it: how UPI became "free"

UPI was developed by the National Payments Corporation of India (NPCI) and launched for public use in 2016. It lets people send money between bank accounts instantly using a phone, and its design is interoperable: different banks and apps can work with each other. It completed ten years in August 2026.

For most of that decade, using UPI cost the customer nothing. For merchants, a major step came at the end of 2019. A government gazette notification dated 30 December 2019 removed the MDR on P2M UPI transactions with effect from January 2020. That made UPI acceptance free for shops, in contrast to cards, which have continued to carry merchant fees.

Free for the payer and the merchant does not mean free to run. Someone pays for the banks' systems, the apps, NPCI's infrastructure and the fraud and dispute handling that sit behind every transaction. In UPI's case, part of that cost was supported by the government. The Ministry of Finance has described an incentive scheme for low-value P2M UPI transactions, with allocations of ₹1,389 crore in FY2021-22, ₹2,210 crore in FY2022-23 and ₹3,631 crore in FY2023-24.

In the meantime, volumes grew very fast. The Ministry reports UPI transaction value rising from ₹21.3 lakh crore in FY2019-20 to ₹260.56 lakh crore by March 2025. In September 2026, NPCI data showed 24.07 billion transactions worth ₹29.37 lakh crore, about 802 million a day. That was 23% more transactions than a year earlier, and 756 banks were live on the system.

Two notes on those numbers. First, "value" is money moved, not consumer spending. Second, September's volume was slightly below August's record of 24.51 billion, partly because September has one day fewer.

When the Supreme Court heard a challenge to the new framework on 28 September 2026, the government's counsel argued that banks incur costs in processing electronic payments, that card payments attract charges while UPI has so far been exempt, and that the levy was needed to keep the ecosystem functioning efficiently. The RBI has described MDR on large-value UPI payments as a step towards the long-term sustainability of digital payments, while saying all UPI transactions remain free for users.

What worked about the free-UPI model

1. A rail that reached scale

Zero-cost acceptance very likely lowered the barrier for small merchants, who did not need a card machine: a printed QR code was enough. Combined with interoperability across banks and apps, this helped UPI become an everyday habit for a very large number of people and businesses.

2. Free for the person paying

Keeping the user side free meant nobody had to weigh a fee against a ₹20 purchase. Under the new framework, that part is meant to stay the same.

3. Public-rail design

Because UPI is a shared network rather than one company's closed system, small banks and many apps can take part. NPCI's data shows hundreds of banks live on the system.

What didn't, or is still unresolved

1. Who funds a free rail

The incentive scheme figures above show how much government support was involved in keeping low-value payments free. The new MDR is, in effect, an attempt to move part of the funding to the merchant side. Whether the amounts raised are enough, and who among banks, apps and infrastructure providers receives them, are the kinds of questions a petition now before the Supreme Court raises. We have not seen the detailed distribution arrangements, so we do not describe them here.

2. Concentration among apps

UPI is a shared network, but usage is concentrated. Reporting on NPCI's app-wise data (the most recent breakdown available at the time, covering August 2026) put three apps at about 86% of transaction volume. Concentration matters for any fee structure, because a few firms may have more influence over how costs are shared and passed on.

3. Are the thresholds the right ones?

The ₹2,000 line and the ₹1 lakh monthly exemption decide who pays. The petition before the Supreme Court argues that these thresholds are not supported by disclosed data. Trade bodies asked the government to consider raising the ₹1 lakh threshold to ₹5 lakh and to defer the fee during the festive season. The government says the thresholds protect the vast majority of merchant transactions. We do not know yet which view the evidence will support.

4. What merchants and customers will actually do

This is the biggest open question, and no reliable evidence exists yet. A merchant who now pays a fee might absorb it, raise prices, steer customers to other payment modes, or nudge them to cash. The rules say customers should not be charged, so any attempt to do so would be worth reporting to the bank or app. A LocalCircles online survey of more than 32,000 responses, released on 16 September 2026, found that only 17% of merchants said they were willing to bear a 0.4% MDR on payments above ₹2,000. Online surveys like this are not random samples, so treat the figure as a signal of sentiment, not a measurement of what will happen.

5. Legal basis and process

The petition asks the court to look at the statutory basis, constitution and authority of the UPI and Services Steering Committee, and at the legal basis for setting the rates. On 28 September 2026, the Supreme Court declined to stay the framework, issued notice to the Centre, the RBI and NPCI, and asked for responses within four weeks. A stay, a change to the framework, or a final ruling would all change this story, so we will update this post as things happen.

The arguments, side by side

The case for the fee (as made by the government, RBI and NPCI) - Running a payments system has real costs, and banks and others bear them. - Card payments carry merchant fees, and UPI has been the exception. - The long-term sustainability of the rail depends on a funding model. - Consumers stay free, and about 96% of merchant transactions are said to be unaffected.

The case against, or for changes (as made by traders and petitioners) - Small businesses are sensitive to even small fees, and the timing falls in the festive season. - The thresholds are not backed by published data and may be arbitrary or discriminatory. - The process and legal authority behind the framework should be examined. - Free UPI helped bring transactions into the formal system, and a fee could push some back (an argument the petitioner's counsel made in court).

Both sets of arguments contain claims we cannot yet test. What we can do is note what evidence would settle each one, and follow it as it appears.

What to watch, and a safety note

  • If you run a shop: check the notices from your bank or UPI app about how the framework applies to your business, and keep an eye on your monthly UPI receipts relative to the ₹1 lakh exemption.
  • If you pay by UPI: you should not be charged. If a merchant asks you for an extra "UPI fee", you can raise it with the merchant and with your bank or app.
  • Be alert to scams. Whenever a payments rule change is in the news, fake messages and calls about "new UPI charges" or "verification" are a common trap. Never share your UPI PIN, OTP, card details or Aadhaar number with anyone who contacts you about charges. Check any notice on the official app or your bank's own channels.

The global lens: Pix and others

Public payment rails have faced this question elsewhere. Brazil's Pix, which we covered in our Pix post, has been free for individuals, and the central bank both regulates and operates it. That dual role is a governance question that critics raise there, and it has a parallel in the questions about UPI's steering committee. We have not compared merchant-side pricing across the two systems, which is a good topic for a later post.

Private mobile-money services such as Kenya's M-Pesa (our M-Pesa post) and Bangladesh's bKash (our bKash post) are commercial services that fund themselves through their own fees and agent networks. The difference is useful to keep in mind: a public rail can choose to subsidise the user side, but then someone else has to cover the cost.

Four questions we ask of every initiative

  1. Who drove it? The RBI guided the effort, NPCI built and operates the system, and banks and apps provide the customer-facing services. The government supported low-value payments through incentives, and a steering committee chaired by NPCI set the new fee framework.
  2. How were people onboarded and identified? Users link a bank account to a UPI app and authorise payments with a UPI PIN through their bank. UPI is a payment system, not an identity system, and ordinary UPI payments do not require Aadhaar each time.
  3. Did people keep using it? Usage is very high and still growing: 24.07 billion transactions in September 2026. But volume is not the same as inclusion. The World Bank's Global Findex 2025 found that India's account ownership is high, at about 89%, while 16% of account holders were inactive (2024 survey data). Heavy UPI use and unused accounts exist side by side.
  4. What happened to trust, fraud and complaint handling? Trust was built on payments that were instant, interoperable and free. The new fee introduces a fresh trust test: whether the promise that customers will not be charged holds in practice. For complaints, the first stop is usually the bank or app involved, and our M-Pesa post's India section explains how responsibility is split across institutions.

What this story tells us

UPI's success shows that a public, interoperable rail can bring very large numbers of people and small businesses into digital payments. The fee debate shows the other half of the story: scale does not make costs disappear, and a payments system has to be paid for somehow.

The most useful questions to carry forward are practical ones. Who pays, and is the burden fair? Are the thresholds backed by evidence? Do customers stay protected? Does the legal basis stand up? And does the change widen or narrow inclusion for the smallest merchants?

We will come back to this after 15 October with what actually happens, instead of what was predicted.

Sources and further reading

Most figures above come from press coverage of NPCI and government releases. Please check the originals on npci.org.in and pib.gov.in. Rules, thresholds and court proceedings can change, and this post reflects information available on 4 October 2026.

Update log

  • 4 October 2026: First published.

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