India's free UPI era may be nearing its end—for big businesses

India's UPI ecosystem may be nearing the end of its zero-fee era—at least for big businesses. The Centre has moved to pave the way for the return of the Merchant Discount Rate (MDR) on UPI transactions, signalling the biggest shift in India's digital payments policy since the zero-MDR regime was introduced in 2020. The move is aimed at reducing the government's subsidy burden while putting the country's booming digital payments ecosystem on a financially sustainable footing.

Government sources told Business Today that the proposal is not intended to affect individual users or small merchants. Instead, discussions have centred on levying MDR only on large merchants, including major e-commerce platforms and businesses that cross a prescribed annual turnover threshold. Small-value transactions and person-to-person UPI payments are expected to remain outside the proposed framework.

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According to sources, discussions on reintroducing MDR have been underway for nearly two years. The latest legislative amendment merely restores the government’s ability to levy MDR by removing the statutory prohibition. The actual rate, threshold, and implementation framework will be finalised only after consultations with industry stakeholders.

MDR is a fee that merchants pay to banks, payment providers, and other intermediaries for processing digital payments.

The move comes amid growing concerns over the financial sustainability of the UPI ecosystem, where banks, payment service providers, and fintech firms have operated under a zero-MDR regime since January 2020. While the government has compensated the industry through incentive payouts, officials believe a long-term monetisation model is needed.

The Union Budget allocated Rs 2,000 crore for UPI incentive payments in FY27, marginally lower than the Rs 2,196 crore provided in FY26. However, industry bodies have consistently argued that these incentives fall well short of actual costs. The Payments Council of India has previously estimated that the sector needs nearly Rs 10,000 crore annually to adequately support payment infrastructure and compensate service providers.

The proposal also echoes recommendations made by Parliament’s Standing Committee on Finance in its 32nd Report, which urged the Finance Ministry to establish a viable revenue mechanism to ensure the financial sustainability of the UPI ecosystem without placing a recurring burden on government finances.

Before January 2020, merchants paid MDR of up to 30 basis points on UPI transactions. The levy was subsequently abolished to accelerate merchant acceptance and drive digital payments adoption.

Since then, UPI has become India’s dominant retail payment platform, processing 241.62 billion transactions worth nearly Rs 314 lakh crore in FY26. The scale of these transactions underscores the growing debate around making the ecosystem financially self-sustaining.