From October 15, some UPI payments will stop being free for the people who receive them. The rules come from two places. On September 14, the Finance Ministry issued a notification under Section 10A of the Payment and Settlement Systems Act, 2007. It kept UPI payments of up to Rs 2,000, and RuPay debit cards, free of any bank or system charge. A day later, the steering committee led by the National Payments Corporation of India (NPCI) announced what happens above that line.Much of the reaction has been noise, so the details are worth setting out first.
Who pays, and how much
The charge is a merchant discount rate, or MDR. It is the fee a business pays for accepting a digital payment, and it is common with cards. For UPI, it will be 0.4 per cent on person-to-merchant (P2M) payments above Rs 2,000.In practice:
| Payment | Charge to the merchant |
| Rs 1,500 to a shop | Nil |
| Rs 2000 to a shop | Nil |
| Rs 3000 to a shop | Rs 12 |
| Rs 10,000 to a shop | Rs 40 |
| Rs 50,000 to a retailer | Rs 200 |
| Rs 75,000 or more | Rs 300 (cap) |
On a Rs 1 lakh purchase, 0.4 per cent would be Rs 400, but the cap keeps it at Rs 300.Several things do not change:
- Transfers between individuals remain free at any amount. Sending Rs 20,000 to a friend costs nothing.
- Small merchants are protected. Those in the P2PM category, receiving up to Rs 1 lakh a month through QR payments into their own accounts, pay nothing, even on a single payment above Rs 2,000. They move into the regular category only if they cross that limit for three consecutive months.
- AutoPay mandates for subscriptions, EMIs, insurance premiums and utility bills carry no prescribed MDR.
- Some sectors pay a flat Rs 5 on payments above Rs 2,000. These are railways, telecom, insurance, fuel and public utilities. A Rs 20,000 railway booking costs Rs 5, not Rs 80.
- Capital-market payments, to mutual funds, brokers and investment platforms, attract 0.02 per cent, also capped at Rs 300.
The customer is not supposed to pay any of this. The government says banks have been told to ensure merchants do not pass the charge on, and that UPI apps cannot add platform fees. On paper, UPI stays free for the consumer.
The case for the fee
The government’s reasoning is not frivolous. UPI now handles about 2,400 crore transactions a month, worth close to Rs 30 lakh crore. A system that size needs constant spending on servers, fraud prevention, cybersecurity, dispute resolution and resilience. Since 2020, the basic merchant payment has earned banks and apps almost nothing, and subsidies have covered part of the gap. NPCI says the new revenue will stay within the ecosystem.The Rs 2,000 line was chosen with care. More than 95 per cent of UPI merchant payments are at or below it, so the tea stall and the kirana shop are untouched. The fee falls on larger commercial payments.So why the uproar over a charge this small?
Small charges rarely stay small
The first reason is precedent. The Securities Transaction Tax was introduced in 2004 alongside the removal of long-term capital gains tax on listed shares. In 2018, the capital gains tax returned. The STT stayed. Dividends, once taxed at the company level, are now taxed in shareholders’ hands at slab rates. The concern is not today’s Rs 40. It is that once a charging mechanism exists, the rate, the cap and the threshold can all change without much public debate.The second is pass-through. The rule says merchants should not add the fee to the bill, but merchants set their own prices. Anyone who has been told “2 per cent extra on card” knows how quickly such costs reach the customer. Retail prices are also rounded, so a Rs 20 cost can turn into a Rs 30 or Rs 50 increase. Once the charge disappears into the price, it becomes harder to see, and cash buyers end up paying it too.The third is cash. Some shopkeepers will offer a discount for cash rather than give up 0.4 per cent. Reports from Delhi suggest some traders have already started. For jewellers, furniture showrooms, contractors and clinics, that is an easy trade. It works directly against the formalisation that UPI has done so much to advance.The fourth is the threshold itself. A Rs 1,999 payment is free and a Rs 2,001 payment is not. A Rs 5,000 bill can become Rs 2,000, Rs 2,000 and Rs 1,000. The system will need monitoring to stop this, which brings its own cost.The fifth is how the numbers are presented. “Over 95 per cent of transactions stay free” counts payments, not money. Industry estimates suggest payments above Rs 2,000 make up about 4 per cent of merchant volume but roughly two-thirds of its value. Those larger payments are also where a digital trail matters most for tax.
A rate that does not fit investing
The capital-market rate needs a second look. Money sent to a broker does not have to result in a trade, and the broker cannot pass the fee to the client. Consider 10,000 customers each making 50 transfers of Rs 2 lakh in a month without trading. At 0.02 per cent, that costs the broker about Rs 2 crore and earns nothing.Regulation makes this worse. SEBI’s settlement rules require brokers to return unused client funds every month or quarter, and many clients send that money straight back, often by UPI. The broker pays each time. A modest MDR here is reasonable, but a cap of Rs 5 or Rs 10 per transfer would make more sense than Rs 300. Otherwise, zero-brokerage delivery trades may not last.
The credibility problem
About 15 months ago, the Finance Ministry dismissed reports of MDR on UPI as false and baseless, and reaffirmed its commitment to free digital payments. Governments are entitled to change their minds. But this reversal joins a longer list. Online real-money gaming was treated as a game of skill, then regulated, then banned within a few years. When policy moves this way, people stop trusting assurances, and a small fee draws a large reaction.
What should happen next
UPI should not be starved of funds. If it needs money for security and resilience, the Budget can provide it openly, as it would for any critical infrastructure. If the MDR stays, three safeguards would help. The government should publish what the fee collects and where it goes. It should lower the cap for capital-market transfers. And it should commit to a review after a year, using data on cash usage and bill-splitting, before any rate or threshold is raised.UPI worked because accepting a payment cost almost nothing. The October fee is small. The rules that govern it should be clear, limited and hard to change quietly.
Disclaimer: Views expressed above are the author’s own.