Fintech

India Ends UPI's Zero-Fee Era: Inside the New MDR Law

India has repealed the statute that kept UPI free. What the new MDR framework means for merchants, banks, fintechs and the world's largest real-time payments rail.

By The Indian Markets Desk 11 min read

For six years, the deal that powered India's payments revolution was simple: tap your phone, pay a merchant, and nobody pays a fee. That arrangement now rests on shakier legal ground. On 17 August 2026, President Droupadi Murmu gave her assent to an amendment of the Payment and Settlement Systems Act, 2007, quietly removing the statutory ban that had kept the Unified Payments Interface (UPI) free to use. The change hands the government a lever it has not held since 2020, and it has reopened one of the most consequential debates in Indian finance.

What actually changed on 17 August#

The amendment arrived folded inside the Taxation and Other Laws (Amendment) Act, 2026, a money bill that Parliament passed in early August and the President signed into law last week. Its payments clause rewrites Section 10A of the Payment and Settlement Systems Act, the provision that since January 2020 had barred banks and payment providers from charging any Merchant Discount Rate (MDR) on UPI and RuPay debit-card transactions.

Under the old wording, zero MDR was mandated in statute. Under the new wording, the blanket prohibition is gone. In its place sits an enabling framework: the central government can now decide, through an executive notification, which payment modes stay exempt from MDR. Anything not explicitly protected can, in principle, attract a fee. The Ministry of Law's gazette notification confirmed the President's assent on 17 August, and the underlying bill is tracked in full by PRS Legislative Research.

Two points deserve emphasis straight away, because the news cycle blurred them. First, no fee has actually been introduced. The law creates the option, not the charge. Second, the Finance Ministry has repeatedly stated that consumers will pay nothing and that most merchant transactions will stay free too. What has changed is the government's freedom to act later without returning to Parliament.

The zero-MDR bargain, explained#

To see why this matters, start with the fee itself. A Merchant Discount Rate is the commission a shop pays its bank each time a customer pays electronically. On a credit-card swipe in India, MDR typically runs between roughly 1.5% and 3% of the bill, split between the merchant's bank, the card network, and the customer's card issuer. That fee is how the plumbing of card payments gets funded.

UPI works differently. It is a real-time, account-to-account rail built by the National Payments Corporation of India (NPCI), moving money directly between two bank accounts without a card in the middle. When the government removed MDR on UPI and RuPay debit cards from 1 January 2020, it made a deliberate trade: give up fee revenue in exchange for mass adoption. The gamble paid off spectacularly. In July 2026, UPI processed a record 23.66 billion transactions worth ₹29.88 lakh crore, roughly 763 million payments a day, with volumes up 22% on the year.

The catch is that free is not costless. Someone still has to run the servers, settle the payments, absorb fraud losses, and reimburse the small merchants who currently receive a government subsidy for accepting digital money. The Union Cabinet has been plugging that gap directly: for 2024-25 it approved a ₹1,500 crore incentive scheme paying banks a small percentage on low-value merchant payments. Banks and fintechs have long argued that annual subsidies are a fragile substitute for a proper revenue model. That tension is what the new law is designed to resolve.

One distinction runs through the whole debate. P2P payments, sending money to a friend, were never going to attract a fee. The question only concerns P2M payments, money going to a merchant, and within that, only larger merchants above some threshold.

Who pays, who gains#

The immediate winners, on paper, are the banks and payment companies that carry UPI's cost base. India's fintech sector has spent years chasing volume while struggling to convert it into profit. A modest, well-designed MDR would give firms such as PhonePe, Google Pay and Paytm a direct revenue line tied to the transactions they already process. PhonePe alone commands close to half of UPI volumes, so even a thin fee on high-value merchant payments could matter for its economics ahead of a long-planned public listing.

Yet the same companies have been notably cautious in public. Through the Payments Council of India, several players have publicly backed keeping UPI free for consumers, wary that any fee narrative could dent the trust that drove adoption. The industry wants sustainable revenue; it does not want to be blamed for making India's favourite payment method more expensive.

For equity markets, the read-through is selective rather than sweeping. Listed lenders with large merchant-acquiring businesses, card networks, and payment-technology firms would see incremental fee income. The effect on bank stocks is likely to be second-order, since UPI MDR, if introduced at the rates being discussed, would remain far smaller than card economics. The more interesting signal is strategic: a credible revenue model reduces the sector's dependence on government subsidies and makes India's digital-payments infrastructure look more like a durable business and less like a permanently subsidised public good.

There is also a competitive wrinkle. RuPay credit cards already carry MDR when used on UPI, unlike debit-based UPI. A broader fee framework could level that field and shape how aggressively banks push credit-on-UPI products, one of the faster-growing corners of Indian consumer finance.

The economics of a real-time payments rail#

To judge whether any of this works, it helps to understand what a payments fee actually funds. Every UPI transaction triggers a chain of messages: the payer's app, the payer's bank, NPCI's central switch, and the payee's bank, all confirming and settling in under a second, at a scale no card network in the world matches. Maintaining that reliability, blocking fraud in real time, and guaranteeing uptime during festival-day spikes carries real operating cost.

MDR is one way to fund it, and the way it is structured changes everything. The framework under discussion is threshold-based rather than universal. Reported proposals, which the government has not confirmed, suggest a rate of roughly 0.25% to 0.5% on merchant payments above ₹2,000, applied only to larger merchants, perhaps those above an annual turnover of ₹1.5 crore. Small kirana stores and street vendors would stay exempt. For comparison, that ceiling sits well below the 1.5%-3% charged on credit cards, so even the upper end would be a light touch.

The design choices are not trivial. As Business Standard has noted, the government must still settle at least six practical questions before any charge can begin: which merchants qualify, what the threshold is (turnover, transaction value, or volume), what the rate is, how revenue is split between banks, how the exemption list is defined, and how compliance is policed. Each answer reshapes who bears the cost. Set the threshold too low and small businesses get caught; set the rate too high and merchants drift back to cash. This is a calibration problem, not a switch to be flipped.

Strengths, risks and the case against#

The case for the reform is coherent. A tiny fee on large merchants, who can most easily absorb it, could fund the system that everyone else uses for free, and replace year-to-year subsidies with a self-sustaining model. RBI Governor Sanjay Malhotra captured the logic bluntly, warning that while talks are "still premature", the cost of running the infrastructure "has to be paid by someone", even if not by ordinary consumers.

The risks are just as real. India's digital-payments boom was built partly on the fact that UPI was free and frictionless. Reintroduce a merchant fee, however narrow, and some shopkeepers may quietly steer customers back to cash, or attempt to pass the charge on despite rules against it. The reputational hazard is acute because the change arrives by executive notification rather than fresh parliamentary debate, which critics argue reduces transparency around a decision that touches hundreds of millions of users.

There is also a credibility question. The government has promised, more than once, that consumers will never be charged and that most merchants will stay exempt. Those promises are policy commitments, not statutory guarantees, since the law now permits far wider charging than officials say they intend. Markets and merchants will watch the eventual notification, not the reassurances, to judge how much of the free system survives.

From subsidy to self-funding: how big a shift is this?#

Placed in context, this looks less like a sudden reversal and more like the slow maturing of a policy. India removed UPI MDR in 2020 to bootstrap adoption. The RBI floated the question of who should pay for payments in a 2022 discussion paper. Now, with UPI woven into daily life and volumes at record highs, the state is testing whether the ecosystem can stand on its own economics rather than lean on the exchequer.

Internationally, the direction is familiar. Most economies fund electronic payments through interchange and merchant fees, and regulators from the European Union to Australia have spent years capping rather than abolishing them. India took the rarer path of zero MDR to spread access first. The 2026 amendment does not abandon that philosophy so much as add a pressure valve, a way to introduce cost-recovery selectively without dismantling the free experience for consumers and small traders. Whether this proves an incremental tweak or the start of a structural shift depends entirely on where the thresholds land, and that decision now sits with the NPCI-chaired UPI and Services Steering Committee.

Key takeaways#

  • The legal ban on UPI fees is gone. From 17 August 2026, an amendment to Section 10A of the Payment and Settlement Systems Act lets the government decide by notification which payment modes stay MDR-exempt, ending the mandatory zero-MDR regime in force since 2020.
  • No fee exists yet. The law creates the option to charge, not the charge itself. Consumers and small merchants are expected to remain exempt.
  • The target is large merchants. Reported, unconfirmed proposals point to roughly 0.25%-0.5% on P2M payments above ₹2,000 for bigger businesses, far below card MDR.
  • Fintech economics could improve. A durable fee would replace fragile annual subsidies such as the ₹1,500 crore incentive scheme and give payment firms a real revenue line.
  • Execution is everything. Six unresolved design questions, from thresholds to revenue-sharing, will determine whether the reform funds the system or pushes merchants back to cash.

Frequently asked questions#

Will I be charged for using UPI now? No fee applies today, and the Finance Ministry has said consumers will not be charged. The new law makes a future merchant fee legally possible, but no charge has been introduced.

What is MDR in plain terms? The Merchant Discount Rate is the small commission a shop pays its bank to accept an electronic payment. It funds the banks and networks that process the transaction. Consumers do not pay it directly.

Who might actually pay a fee? Only larger merchants, above a threshold still to be defined. Person-to-person transfers and small merchants are expected to stay exempt.

Why change a system that works? Running UPI costs money, and the government has been subsidising it. Officials and the RBI argue a modest, targeted fee could make the system self-sustaining rather than dependent on annual budget allocations.

How much could the fee be? Reports suggest 0.25% to 0.5% on merchant payments above ₹2,000, but the government has not confirmed any rate. Treat these figures as estimates, not decisions.

Who decides the final structure? The UPI and Services Steering Committee, chaired by NPCI, is expected to set the rate, thresholds and exemptions once the government issues its notification.

References#

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