| 55.49 Cr UPI users onboarded (Jun 2026) | 24,162 Cr Transactions, FY2025-26 | ₹314.2L Cr Value transacted, FY2025-26 | ~11% Of industry cost covered by incentives | |
| Part I: The Core Tension |
| The ₹1,000 Payment that isn’t really free |
| | | A customer pays ₹1,000 on UPI. The merchant receives the full ₹1,000. But processing that transaction still costs money servers, bank infrastructure, fraud detection, dispute handling, compliance. Zero MDR means the price to the merchant is zero. It does not mean the underlying cost of running the payment is zero. | |
| Zero Price ≠ Zero Cost | | The Government’s own March 2025 Cabinet note acknowledges that the digital-payment industry incurs expenditure providing payment services expenditure normally recovered through MDR (Merchant Discount Rate). That single sentence is the foundation of the entire 2026 policy debate. | | |
| MDR is the fee a merchant pays for accepting a digital payment. Before zero-MDR, NPCI’s applicable UPI P2M MDR could run up to 0.30%; RBI-permitted debit card MDR could reach 0.90%. From 1 January 2020, that rate was taken to zero for ordinary bank-account-to-merchant UPI and RuPay debit payments a deliberate adoption policy, not a permanent economic law of nature. |
| Part II: How Zero MDR Built UPI |
| Adoption exploded and so did scale |
| Zero MDR removed the shopkeeper’s main reason to prefer cash. The result: UPI transaction volumes grew roughly 5.3x in just four years, from FY2021-22 to FY2025-26. July 2026 alone set a fresh record: approximately 23.66 billion transactions worth ₹29.88 lakh crore volume up ~22% and value up ~19% year-on-year. India now processes roughly three-quarters of a billion UPI transactions on an average day. This is no longer a fintech product; it is national payments infrastructure. |
| UPI Annual Transaction Volume, FY22–FY26 (Crore transactions) |
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| Source: Ministry of Finance / PIB, July 2026 UPI statistics release (NPCI data) |
| Part III: Who Pays When the Merchant Doesn’t |
| The Government stepped in, but only partially |
| Rather than let merchants absorb MDR, the Government created an incentive scheme for eligible low-value BHIM-UPI person-to-merchant transactions. Under the FY2024-25 structure, small merchants earned a 0.15% incentive on transactions up to ₹2,000; MDR itself stayed at zero across the board, for both small and large merchants, regardless of transaction size. |
| Cumulative disbursement across FY2021-22 to FY2024-25 totalled ₹8,276 crore. The same impact study found real results: 94% of surveyed small merchants had adopted UPI, 57% reported higher sales, and UPI QR deployment grew from 9.3 crore to roughly 65.8 crore. Zero MDR was, in effect, industrial policy an investment in building a national digital-payments network, not an arbitrary giveaway. |
| Government UPI Incentive Disbursed by Year (₹ crore) |
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| Source: Ministry of Finance / DFS, February 2026 impact assessment; PIB Cabinet note, March 2025 |
| Part IV: From Sustainability Warning to Policy Shift |
| In March 2026, Parliament’s Standing Committee on Finance raised a fundamental question about UPI’s long-term economics: can a payments system of this scale continue to grow without a sustainable revenue model? |
| The Committee warned that the existing funding arrangement was becoming structurally difficult to sustain and urged the Government to explore a self-reliant, tiered revenue model, rather than relying indefinitely on taxpayer-funded incentives. Its assessment highlighted the size of the funding gap: Government incentives were estimated to cover only around 11% of the industry’s actual costs and roughly 14% of potential MDR collections foregone under the zero-MDR regime. |
| The warning did not amount to a recommendation to start charging every UPI transaction. Rather, it raised a more nuanced policy question: could UPI preserve zero-cost acceptance for small merchants and low-value transactions while allowing parts of the ecosystem particularly larger commercial use cases to contribute toward the cost of running the infrastructure? |
| Part V: What Actually Changed in August 2026 |
| Parliament rewrote the rulebook not the price |
| On 4 August 2026, the Government introduced the Taxation and Other Laws (Amendment) Bill, 2026 (Bill No. 150 of 2026). It amends Section 10A of the Payment and Settlement Systems Act, 2007. Previously, the zero-charge rule was tied to payment modes prescribed under income-tax law. Under the new framework, the Central Government can specify by notification which electronic payment modes must remain free of charge far greater flexibility to treat different payment categories differently. The Lok Sabha passed the Bill on 6 August 2026; it subsequently cleared the Rajya Sabha, completing the parliamentary process in August. |
| What This Does Not Mean | | The legislation creates regulatory flexibility it does not itself set a 0.3% or 0.5% MDR, a ₹2,000 or ₹10,000 threshold, or a customer transaction fee. Finance Minister Nirmala Sitharaman has publicly stated no decision on MDR has yet been taken, and distinguished merchant charges from consumer charges. The door to MDR has been opened; MDR itself has not yet walked through it. | | |
| Two Myths Worth Killing Early |
| | “GST will be charged on UPI above ₹2,000” False. The Finance Ministry explicitly rejected this in April 2025. GST can only apply to a payment-related fee such as MDR, not the underlying transaction amount and while MDR is zero, there is no fee for GST to apply to. | | | “₹2,000 is the MDR threshold” No. ₹2,000 was the cutoff for the small-merchant low-value incentive scheme, not a proposed charging threshold. Zero MDR applies far more broadly than the incentive itself. | | |
| Part VI: What a Tiered Model Could Look Like |
| Small merchants stay protected; big-ticket flows may not |
| The Committee did not call for charging every chai-shop transaction it argued for a system that protects financial inclusion while creating a viable revenue source. The likely shape of debate: |
| Segment | Likely Treatment | | Small merchant, any amount | Zero MDR retained | | Large merchant, low-value payment | Zero or very low MDR | | Large merchant, high-value payment | Capped MDR under consideration | | Government subsidy | Increasingly concentrated on inclusion segments: rural markets, small merchants, low-ticket transactions | | |
| Why large merchants are the likely focus: a roadside vendor accepting ₹30 and a national e-commerce platform accepting ₹60,000 currently receive identical zero-MDR treatment. The tiered argument asks whether taxpayers should subsidise payment processing for both in exactly the same way. |
| Timeline at a Glance |
| Date | Event | | Jan 2020 | Zero MDR takes effect for UPI and RuPay debit-card transactions. | | FY22-FY25 | ₹8,276 crore disbursed cumulatively under the low-value BHIM-UPI incentive scheme. | | Mar 2025 | Cabinet approves ₹1,500 crore FY2024-25 incentive scheme; 0.15% incentive on eligible small-merchant transactions up to ₹2,000. | | Feb 2026 | DFS impact study: 94% small-merchant adoption, 80% UPI share of digital transactions. | | Mar 2026 | Standing Committee on Finance warns funding model is unsustainable; recommends tiered revenue model. | | Jul 2026 | UPI hits 23.66 billion monthly transactions, worth ₹29.88 lakh crore a fresh record. | | 4 Aug 2026 | Taxation and Other Laws (Amendment) Bill, 2026 introduced; amends PSS Act Section 10A. | | 6 Aug 2026 | Lok Sabha passes the Bill; Rajya Sabha clears it shortly after. | | Next | Watch for the Government notification specifying which payment modes remain charge-free. | | |
