Centre and banks to settle UPI subsidy once merchant charges begin
If large merchants start paying for UPI, how much should the government still subsidise it?
Published 26 September 2026. Written by Pratidin from the reports linked at the end; every fact checked by a separate review before publishing. How we work
The Union government and banks will decide the size of the subsidy for UPI and RuPay debit card payments after a merchant discount rate (MDR) on some UPI payments takes effect on 15 October 2026, The Hindu reported. The Finance Ministry is consulting the Indian Banks' Association and traders' bodies such as the Confederation of All India Traders (CAIT) on the change. The Union Budget for 2026-27 has set aside ₹2,000 crore to promote low-value BHIM-UPI and RuPay debit card transactions.
Under the new framework, a 0.4% MDR applies to person-to-merchant UPI payments above ₹2,000, capped at ₹300. Payments up to ₹2,000, all person-to-person transfers and merchants receiving up to ₹1 lakh a month through UPI stay free. Railways, telecom, insurance and fuel pay a flat ₹5, and capital market payments 0.02%. NPCI says transactions of ₹2,000 or less make up over 96% of merchant volume. Merchants, not customers, bear the MDR, and GST-registered merchants can claim the GST paid on it as input tax credit.
UPI has run on zero MDR since January 2020, with the government reimbursing banks through an incentive scheme. Payouts rose from ₹1,389 crore in 2021-22 to a peak of ₹3,631 crore in 2023-24, while industry estimates put UPI's annual running cost at about ₹20,000 crore. The Payments Council of India had sought over ₹10,000 crore. UPI handled 2,451 crore transactions worth ₹29.82 lakh crore in August 2026. CAIT has asked for the charge to be postponed, and the Finance Minister is to meet traders.
Prelims facts
- The National Payments Corporation of India (NPCI), which runs UPI, RuPay and BHIM, was set up in 2008 by the RBI and the Indian Banks' Association under the Payment and Settlement Systems Act, 2007.
- The merchant discount rate is the fee a merchant pays its bank for accepting digital payments; it has been zero for UPI and RuPay debit cards since January 2020.
- The 2024-25 incentive scheme for low-value BHIM-UPI payments had an outlay of ₹1,500 crore and paid 0.15% on small-merchant payments up to ₹2,000.
Quick recall
- When does MDR on some UPI payments begin?
- 15 October 2026.
- What is the standard UPI MDR rate and cap?
- 0.4%, capped at ₹300, on merchant payments above ₹2,000.
- Which merchants are exempt regardless of payment size?
- Those receiving up to ₹1 lakh a month through UPI.
- What flat MDR applies to railways, telecom, insurance and fuel?
- ₹5 per transaction.
- How much has Budget 2026-27 set aside for the UPI and RuPay incentive?
- ₹2,000 crore.
- What was the peak incentive payout and in which year?
- ₹3,631 crore in 2023-24.
- Since when had UPI carried zero MDR?
- January 2020.
- Who pays the MDR, the customer or the merchant?
- The merchant; customers are not to be charged extra.
Prelims practice question
Under the UPI charge framework effective 15 October 2026, which one of the following payments attracts the 0.4% merchant discount rate?
- A ₹1,500 payment to a large supermarket
- A ₹5,000 transfer to a friend
- A ₹5,000 payment to a large electronics store
- A ₹5,000 payment to a vendor who receives ₹60,000 a month through UPI
Show answer
Answer: (c) A ₹5,000 payment to a large electronics store. MDR applies only to person-to-merchant payments above ₹2,000. Payments up to ₹2,000, person-to-person transfers and merchants receiving up to ₹1 lakh a month are exempt.
Use this in UPSC Mains: previous-year questions
Recurring theme: Financial inclusion and the digital payments ecosystem
- How to use this
Use the UPI charge design to show how pricing of digital payments is being calibrated to protect inclusion of small users and merchants.
- From 15 October 2026 a 0.4% MDR (capped at ₹300) applies only to merchant UPI payments above ₹2,000; smaller payments, all P2P transfers and merchants receiving up to ₹1 lakh a month stay free.
- NPCI says transactions of ₹2,000 or less are over 96% of merchant volume, and the 2026-27 Budget keeps ₹2,000 crore to promote low-value BHIM-UPI and RuPay debit card use.
- Scale of digital inclusion: UPI handled 2,451 crore transactions worth ₹29.82 lakh crore in August 2026.
- How to use this
Use UPI to show inclusion achieved through state subsidy, and the test of whether a partly market-priced system can stay inclusive.
- UPI has run on zero MDR since January 2020, with government reimbursing banks: ₹1,389 crore in 2021-22, peaking at ₹3,631 crore in 2023-24, against industry estimates of about ₹20,000 crore annual running cost.
- The new 0.4% MDR on merchant payments above ₹2,000, capped at ₹300, is borne by merchants; low-value payments and small merchants stay free.
- Risks: traders may push high-value buyers back to cash, hurting formalisation; CAIT has asked for the charge to be postponed.
- How to use this
Use it to conclude that inclusion of the poor needs not only accounts but low-cost, usable payment channels, which the state continues to subsidise.
- The 2024-25 incentive scheme (₹1,500 crore) paid banks 0.15% on small-merchant payments up to ₹2,000, and the 2026-27 Budget sets aside ₹2,000 crore for low-value BHIM-UPI and RuPay debit card payments.
- Even with the new MDR from 15 October 2026, payments up to ₹2,000 and merchants receiving up to ₹1 lakh a month stay free, protecting low-income users.
The debate over who pays for UPI is useful context when comparing a privately operated payment rail with a central bank digital currency.
Mains practice question
Zero MDR helped UPI grow into a public digital good but left its costs to banks and government subsidies. Examine the rationale for and risks of a merchant discount rate on high-value UPI payments. (150 words)
Model answer
Since January 2020, UPI and RuPay debit cards have carried zero merchant discount rate (MDR), with the government reimbursing banks through an incentive scheme. From 15 October 2026, a 0.4% MDR, capped at ₹300, will apply to merchant payments above ₹2,000.
Rationale
- Sustainability: industry estimates UPI's running cost at about ₹20,000 crore a year, against peak subsidy of ₹3,631 crore (2023-24) and ₹2,000 crore budgeted for 2026-27.
- Investment: fees can fund cybersecurity, fraud prevention and uptime as volumes reach 2,451 crore transactions a month (August 2026).
- Targeted design: payments up to ₹2,000 (over 96% of merchant volume), P2P transfers and merchants below ₹1 lakh a month stay free.
- Fiscal relief: frees budget space while keeping a smaller subsidy for low-value use.
Risks
- Cash relapse: traders may push high-value buyers back to cash, hurting formalisation.
- Pass-through: merchants may raise prices despite rules against surcharging.
- Compliance burden: GST on MDR, though creditable, adds paperwork for small firms.
- Market structure: fee income may further favour large apps and banks.
Way forward
- Review the ₹2,000 and ₹1 lakh thresholds with data after six months.
- Keep a transparent, formula-based subsidy for low-value and rural payments.
- Ring-fence part of MDR income for security and grievance redress.
- Consult traders through bodies such as CAIT before further changes.
A calibrated MDR can make UPI financially sustainable without undoing the financial inclusion it has achieved.
The basics
Why this matters
UPI is India's most used payment system, and for six years it has been free for both customers and merchants. That changes partly on 15 October 2026, when large merchants begin paying a small fee on payments above ₹2,000. The government and banks must now decide how much subsidy is still needed for the free segment. The outcome affects the cost of digital payments, bank incentives and the fiscal bill.
How the new charges work
The charge falls only on person-to-merchant payments above ₹2,000, and only on merchants who receive more than ₹1 lakh a month through UPI. The standard rate is 0.4%, capped at ₹300, so a ₹3,000 payment costs the merchant ₹12. Some sectors get a flat fee, and capital markets a lower rate. Customers are not supposed to pay anything extra, and GST on the fee is creditable.
- 1Standard rate0.4% on merchant payments above ₹2,000, capped at ₹300
- 2Flat fee₹5 for railways, telecom, insurance and fuel
- 3Capital markets0.02%
- 4ExemptP2P transfers, payments up to ₹2,000, merchants up to ₹1 lakh a month
Who has been paying so far
With zero MDR, banks and apps earned nothing from merchants for processing UPI payments. The government filled part of the gap through an incentive scheme. Payouts climbed as volumes exploded and peaked in 2023-24. Industry says the subsidy covered only a fraction of the real cost, about a tenth by some estimates, which is why banks and payment firms pressed hard for a merchant charge.
Two models side by side
The zero-MDR model treated UPI like a public road: free to use, maintained by the state. The new model is closer to a toll road where only heavy vehicles pay. Supporters say this protects small users while making the system sustainable. Traders' bodies worry that high-value buyers may drift back to cash or that merchants will quietly pass on the cost.
- No fee for anyone
- Costs covered partly by subsidy
- Rapid adoption
- Weak incentive for bank investment
- Fee only on large merchant payments
- Small users stay free
- Revenue for security and uptime
- Risk of cash relapse among traders
What to watch
Three things will decide whether the change works. First, whether the reduced subsidy is enough to keep banks interested in low-value payments. Second, whether merchants comply without surcharging customers. Third, whether the thresholds are reviewed with data. The earlier incentive scheme tied part of the payout to low technical declines and high uptime, a model that could continue under the new regime as well.
You now know
- From 15 October 2026, a 0.4% MDR (cap ₹300) applies to UPI merchant payments above ₹2,000.
- P2P transfers, payments up to ₹2,000 and merchants below ₹1 lakh a month stay free.
- Budget 2026-27 allots ₹2,000 crore to promote low-value UPI and RuPay payments.
- Zero MDR on UPI and RuPay debit cards had applied since January 2020.
Go deeper
In one line: UPI will charge large merchants a small fee from 15 October 2026, so the government and banks must now decide how much subsidy the free part still needs.
Why it matters for UPSC
Digital payments sit in GS3 (economy, inclusive growth). Prelims can test thresholds, NPCI's role and the meaning of MDR; Mains can ask about sustainability and financial inclusion.
The core idea
The Merchant Discount Rate is the fee merchants pay to accept digital payments. Since January 2020 it was zero on UPI, and the government paid banks through the UPI Incentive Scheme. NPCI has now set a 0.4% fee on merchant payments above ₹2,000, with wide exemptions. Merchants can offset GST on the fee through Input Tax Credit. The question is how large the leftover subsidy for small payments should be.
Numbers and dates to remember
- 15 October 2026: MDR starts.
- 0.4%, cap ₹300; ₹5 flat for railways, telecom, insurance, fuel.
- ₹1 lakh a month: merchant exemption threshold.
- 96%: share of merchant transactions still free.
- ₹2,000 crore: 2026-27 budget allocation; ₹3,631 crore: peak payout (2023-24).
Where to go next
- Merchant Discount Rate: The fee behind every card swipe and QR scan
- NPCI: The not-for-profit that runs UPI
- UPI Incentive Scheme: How the government paid for 'free' UPI
- Input Tax Credit: Why GST on the fee may cost merchants little
Go deeper: who should pay for a public payment rail?
UPI is run by NPCI, a not-for-profit company owned by banks, but it behaves like public infrastructure. Every payment uses bank servers, app providers and NPCI's switch, all of which cost money. With a zero Merchant Discount Rate, those costs were met partly by banks and partly by the UPI Incentive Scheme.
The subsidy was always uneven. Payouts depended on each year's budget, rising to ₹3,631 crore in 2023-24 and then falling. The Budget estimate for 2025-26 was just ₹437 crore before being revised upward, and 2026-27 has ₹2,000 crore. Industry says the true running cost is around ₹20,000 crore a year.
The new design is a hybrid. High-value merchant payments, only about 4% of merchant volume but about two-thirds of its value, now pay. Everything small remains free and subsidised. GST on the fee is creditable as Input Tax Credit for registered merchants, which reduces the real burden.
For Mains, frame the choice as a trade-off between inclusion and sustainability. The better answer is not a single fee but a transparent rule: which payments are free, who pays for them, and how the subsidy is linked to performance such as uptime and low failure rates.
Where to go next
- Merchant Discount Rate: The fee behind every card swipe and QR scan
- NPCI: The not-for-profit that runs UPI
- UPI Incentive Scheme: How the government paid for 'free' UPI
- Input Tax Credit: Why GST on the fee may cost merchants little
Merchant Discount Rate
The fee behind every card swipe and QR scan
In one line: The merchant discount rate is a small fee a shop pays its bank when a customer pays digitally.
How it works
If you pay ₹3,000 at a big store by UPI after 15 October 2026, the store pays 0.4% of that, or ₹12, to the banks and apps that moved the money.
Who does not pay
You, the customer, should not pay anything extra. Small shops and small payments up to ₹2,000 stay free, and sending money to a friend or family member is always free.
Where to go next
- NPCI: The not-for-profit that runs UPI
- UPI Incentive Scheme: How the government paid for 'free' UPI
NPCI
The not-for-profit that runs UPI
In one line: The National Payments Corporation of India is the organisation that runs UPI, RuPay cards and BHIM.
Who set it up
It was set up in 2008 by the Reserve Bank of India and the Indian Banks' Association, under the Payment and Settlement Systems Act, 2007.
What it does
It builds and runs the systems that connect banks, so money moves instantly between accounts when you scan a QR code. It does not keep your money; banks do. From 15 October 2026 it has also set the new fee for large merchant payments.
Where to go next
- Merchant Discount Rate: The fee behind every card swipe and QR scan
- UPI Incentive Scheme: How the government paid for 'free' UPI
UPI Incentive Scheme
How the government paid for 'free' UPI
In one line: It is the money the government pays banks so that small UPI payments can stay free.
Why it exists
Since January 2020, banks could not charge merchants for UPI. To keep them interested, the government paid them a small amount for each low-value payment.
A recent example
For 2024-25, the scheme had ₹1,500 crore and paid 0.15% on small-merchant payments up to ₹2,000. Part of the money was paid only if banks kept failures low and systems running.
Where to go next
- Merchant Discount Rate: The fee behind every card swipe and QR scan
- NPCI: The not-for-profit that runs UPI
Input Tax Credit
Why GST on the fee may cost merchants little
In one line: Input tax credit lets a business subtract the GST it paid on its costs from the GST it owes on its sales.
Why it matters here
The MDR fee attracts GST. But a GST-registered merchant can claim that GST back as a credit.
The result
For registered businesses, the real cost of GST on the UPI fee is small. Unregistered sellers do not get this benefit, but most of them are small shops that fall below the ₹1 lakh a month limit and pay no fee at all.
Where to go next
- Merchant Discount Rate: The fee behind every card swipe and QR scan
- NPCI: The not-for-profit that runs UPI
Take the 26 September 2026 quiz: 30 Prelims-style questions with answers