Govt: No bank charge on UPI payment up to Rs 2,000

Why in the News

The Ministry of Finance has notified that no bank or system provider may impose any charge, directly or indirectly, on a payment made through RuPay debit cards or through the Unified Payments Interface (UPI), the National Payments Corporation of India’s real time system for transferring money between bank accounts using a virtual address, up to Rs 2,000. The notification does not specify any charge for transactions above that amount, which opens the way for a fee on higher value person to merchant payments. It follows the Taxation and Other Laws (Amendment) Bill, 2026, passed by Parliament last month, which removed the statutory bar on charging for these payment modes. The contested point is that a threshold covering 96 per cent of person to merchant transactions by number leaves roughly two thirds of their value open to a charge.

What is the Merchant Discount Rate?

1. What it is: The Merchant Discount Rate (MDR) is the fee a bank that processes a card or digital payment levies on the merchant receiving it.
2. What it pays for: It covers transaction processing, settlement and payment infrastructure costs across the chain of banks and providers that carry the payment.
3. The usual range: An MDR normally runs between 1 and 3 per cent of transaction value on debit and credit card payments.
4. The exemption since 2020: No MDR has been levied on RuPay debit cards and UPI transactions since January 2020, a decision taken to promote adoption of digital payments.

What has the notification done, and who decides a fee above the threshold?

1. The prohibition: The notification bars any charge, direct or indirect, on RuPay debit card payments and on UPI transactions of up to Rs 2,000, whether imposed on the person making or the person receiving the payment.
2. The silence above the threshold: The ministry did not specify charges for transactions above Rs 2,000, which is what creates the opening for an MDR on higher value person to merchant payments.
3. The deciding body: Whether an MDR is imposed above the threshold will be decided by the UPI and Services Steering Committee, headed by the National Payments Corporation of India (NPCI), with 22 members including banks, third party application providers such as PhonePe and Google Pay, the Payments Council of India and the Indian Banks’ Association.
4. The rate under discussion: Payments industry officials have suggested an MDR of around 0.4 to 0.5 per cent for UPI payments to large merchants, which would help meet the industry’s annual cost of about Rs 20,700 crore.

What legal change made this possible?

1. The provision amended: The Bill amended Section 10A of the Payment and Settlement Systems Act, 2007, which had barred any bank or system provider from imposing a charge on payments made through the electronic modes prescribed under Section 269SU.
2. The modes covered: Those prescribed modes were RuPay debit cards, BHIM UPI and the UPI QR code.
3. Who the underlying obligation binds: Section 269SU of the Income Tax Act, 1961 applies to businesses with a turnover of over Rs 50 crore, requiring them to offer the prescribed electronic payment modes.
4. What the amendment enables: Removing the exemption paves the way for an MDR on UPI and RuPay debit card payments to large merchants such as e commerce platforms.
5. The stated rationale: The amendment is presented as an enabling provision for UPI’s long term sustainability, technological advancement and resilience against emerging risks.

Why does the Rs 2,000 threshold matter for UPI’s economics?

1. Small share by number: Only 4 per cent of person to merchant UPI payments in 2025 to 26 were for more than Rs 2,000.
2. Large share by value: Those same transactions accounted for about two thirds of total person to merchant UPI payment value.
3. The base: More than 24,000 crore UPI transactions worth Rs 314 lakh crore were made during the year.
4. What the design achieves: The threshold protects the small ticket everyday payment from any charge while leaving the value where a percentage fee actually earns revenue open to one.

How has the state paid for zero MDR so far?

1. The incentive scheme: The government subsidises payments of up to Rs 2,000 made to small merchants through its incentive scheme for promotion of RuPay debit cards and low value BHIM UPI person to merchant transactions.
2. The cap and the exclusion: The incentive is capped at 0.15 per cent of transaction value, and large merchants are not covered by the scheme at all.
3. What it costs: The Budget for 2026 to 27 estimated the payout at Rs 2,000 crore. Rs 2,196.21 crore was paid in 2025 to 26, up from Rs 1,922.77 crore in 2024 to 25.
4. The sustainability finding: A March report of the Standing Committee on Finance recorded that the absence of MDR makes the UPI ecosystem financially unsustainable.

Challenges to reintroducing a Merchant Discount Rate on UPI

1. Merchant pass through to the customer: A merchant charged a percentage fee recovers it by quoting a higher price or by preferring cash for large tickets. Eg. Many small retailers added a surcharge on card payments before the Reserve Bank of India barred the practice on debit cards.
   The Fix: Bar surcharging by contract with the acquiring bank and make the ban a condition of merchant onboarding.
2. Threshold gaming by splitting payments: A fixed value threshold invites a single large payment being broken into several below the cut off. Eg. A Rs 5,000 purchase settled as three separate UPI transfers falls entirely inside the exempt band.
   The Fix: Apply the threshold to the aggregate value settled to one merchant from one payer in a day rather than to a single transaction.
3. Definition risk on the large merchant: The charge is designed to fall on large merchants, and the line between a large and a small merchant sits on self declared turnover. Eg. Section 269SU already uses a Rs 50 crore turnover test that a merchant can restructure across entities.
   The Fix: Anchor the classification to verified Goods and Services Tax turnover rather than to a declaration made at onboarding.
4. Fiscal and commercial funding running in parallel: An incentive subsidy and an MDR answer the same infrastructure cost, and running both leaves the split unstated. Eg. The subsidy payout has risen each year while the industry’s stated annual cost has stayed far above it.
   The Fix: Publish a stated glide path withdrawing the incentive as MDR revenue begins, so the two do not fund the same cost twice.

Conclusion

The zero fee regime on UPI was paid for by the exchequer, and the bill grew every year while the payments industry’s own cost stayed several times larger. The notification shifts the funding of the large value end of the system from the Budget to the merchant, and leaves the small everyday payment where it was. What to watch is whether the UPI and Services Steering Committee sets a rate above the threshold at all, and whether merchants at that end of the market stay on UPI once it does.

Back2Basics: National Payments Corporation of India

1. What it is: NPCI is the umbrella organisation for retail payments and settlement systems in India.
2. How it was set up: It was incorporated in 2008 as a not for profit company, promoted jointly by the Reserve Bank of India and the Indian Banks’ Association.
3. Its statutory anchor: It operates under the Payment and Settlement Systems Act, 2007, which is the law governing payment systems in India.
4. What it runs: Its systems include UPI, RuPay, the Immediate Payment Service, the National Automated Clearing House and FASTag.

Matching Previous Year Question

“[2023, GS3, 10 marks] What is the status of digitalization in the Indian economy? Examine the problems faced in this regard and suggest improvements.”