Fear of shift to cash due to merchant fee on UPI ‘100% misplaced’: Govt sources

Why in the News

A merchant discount rate of 0.4 per cent will apply to Unified Payments Interface (UPI) payments made to merchants above Rs 2,000 from 15 October, under a decision of the National Payments Corporation of India (NPCI). The government has called fears of a public shift back to cash “100% misplaced”, noting that a merchant fee already applies to credit and debit cards other than RuPay debit cards and that those cards continue to be used. A Goods and Services Tax (GST) of 18 per cent applies on the fee itself. The contested point is whether a charge levied on the seller stays with the seller, or reaches the buyer as a higher price.

What is the merchant discount rate now applying to UPI?

1. What the charge is: A merchant discount rate (MDR) is a fee paid by the seller on a payment accepted electronically. On UPI it has been set at 0.4 per cent of the transaction value.
2. Where it applies: It applies to person to merchant UPI transactions of more than Rs 2,000, and takes effect on 15 October.
3. Who receives it: The fee is split between the payments industry players that run the rail, which includes banks, payment gateways, UPI apps and other service providers.

How narrow is the fee’s incidence?

1. Share of transactions: Only 4 per cent of person to merchant UPI transactions are for more than Rs 2,000 and will attract the fee.
2. Share of value: That small group of payments accounts for two thirds of person to merchant UPI payments measured by value.
3. Merchants untouched: Around three fourths of India’s merchants accepting digital payments have never recorded a UPI transaction above the threshold, so they stay outside the fee altogether.
4. Transfers stay free: All person to person UPI payments remain without any MDR.
5. RuPay debit exempt: Payments made by RuPay debit card attract no MDR even above the threshold.

Why does the government reject the fear of a shift back to cash?

1. Card fees already exist: An MDR already applies to credit and debit cards other than RuPay debit cards, and users have not given those cards up.
2. Merchants already absorb it: Merchants have always absorbed the MDR on credit cards while continuing to accept Visa, Mastercard and American Express.
3. The comparison on rates: The merchant fee on debit and credit cards runs broadly in the range of 1 per cent to 3 per cent, significantly higher than the rate set for UPI.

What is the stated purpose of charging for UPI?

1. Cost of a free service: The stated ground is that a payment service cannot be supplied free indefinitely without exhausting the business that funds it.
2. Reinvestment rather than full recovery: NPCI’s managing director and chief executive officer said the objective is not to recover the full cost of running UPI, but to generate enough revenue for banks and payment companies to keep investing in the ecosystem.

What else decides how much of the fee reaches the buyer?

1. The pass through concern: Shopkeepers may stop accepting UPI, and consumers expect sellers to pass the fee on by raising prices.
2. A monitoring mechanism: The government is willing to talk to the Indian Banks’ Association (IBA) to set up a mechanism for monitoring whether shopkeepers pass the MDR to buyers.
3. Talks with traders: The government will also speak to traders, including the Confederation of All India Traders (CAIT), about the issue.
4. Tax on the fee: GST of 18 per cent applies on the MDR on person to merchant UPI payments, which lifts the seller’s cost above the notified rate.
5. The stated hope on the tax: The position taken is that the GST Council will take a favourable view and be reasonable on the rate.
6. The Council’s agenda: The GST Council meets on 7 October and is not expected to discuss the indirect tax rate on the MDR.

Challenges to the UPI merchant discount rate

1. Pass through is hard to police: A monitoring arrangement cannot observe a shopkeeper who quotes one price for cash and a higher one for UPI. Eg. Surcharging on card payments continues at small outlets even though the card rules bar it.
   The Fix: Require the acquiring bank to certify surcharge free acceptance as a condition of the merchant’s UPI acceptance agreement.
2. A value threshold invites splitting: A fee that triggers above a transaction value gives the seller a reason to break one payment into two below the line. Eg. The fee applies only above Rs 2,000, so a bill just over that figure can be collected as two smaller payments.
   The Fix: Levy the fee on a merchant’s aggregate monthly person to merchant value rather than on the size of each transaction.
3. The revenue split leaves acquirers last: The fee is divided among banks, gateways and app providers, so the share reaching the party that actually onboards a small shop may not cover that cost. Eg. Person to merchant acceptance among small merchants was built on zero MDR and on government incentive payouts to banks.
   The Fix: Fix a minimum acquirer share of the fee in the settlement rules so merchant onboarding stays funded.
4. A priced rail can be repriced: A charge introduced administratively can be raised the same way, and the rail loses its universality if some sellers refuse the instrument above the threshold. Eg. The European Union caps interchange at 0.2 per cent on debit cards and 0.3 per cent on credit cards precisely to keep acceptance universal.
   The Fix: Notify a statutory ceiling on the person to merchant fee so the rate cannot be revised upward by the operator alone.

Conclusion

The charge is small and narrowly aimed, and it still changes what UPI is: a rail built on being free to use now carries a price for sellers above a value threshold. Whether that price stays with the seller is not settled by the fee’s design but by enforcement the government has yet to build. Two things are worth watching. The first is whether a monitoring arrangement with the banks is in place before the fee takes effect, and the second is whether the tax levied on the fee is revisited once the Council turns to it.

Back2Basics: National Payments Corporation of India

1. What it is: An umbrella organisation for retail payments and settlement systems in India, incorporated in 2008 as a not for profit company.
2. Promoters and statutory basis: It was promoted by the Reserve Bank of India and the Indian Banks’ Association under the Payment and Settlement Systems Act, 2007.
3. Systems it operates: UPI, RuPay, the Immediate Payment Service, the National Automated Clearing House, the Aadhaar Enabled Payment System and FASTag.

Matching Previous Year Question

“[2026] Which one of the following statements about Unified Payments Interface (UPI) and Central Bank Digital Currency (Digital Rupee) is NOT correct? (a) UPI is a real-time payment system but Digital Rupee is akin to sovereign paper currency (b) In case of UPI, settlement for end users happens instantly; in case of Digital Rupee, wallet balance gets transferred to another wallet (no traditional settlement) (c) UPI transactions are recorded by banks and reflected in bank statements; in case of Digital Rupee, no data is captured in bank statements (d) In both the cases (UPI and Digital Rupee), the liability lies with the users and their respective banks Answer: (d)”