Why Are Users Worried About UPI Charges?

The Lift Line

A charge aimed at large merchants and a fear felt by every small user are not the same event, but they are about to share a headline.

Why This Editorial Matters for Your Exam

Most GS3 fintech answers treat UPI as a fixed, permanently free public good. This explainer supplies the harder, testable structure: UPI’s zero-MDR status was never free in an economic sense, it was subsidised and legally mandated, and both supports are now visibly under strain. A strong answer distinguishes the legislative change (permissive, broad) from the executive design intent (narrow, merchant-side) and explains why conflating the two produces the current user anxiety.

GS Paper 3: Indian economy and issues relating to planning, mobilisation of resources; Digital Public Infrastructure (DPI) and its regulatory architecture; government budgeting.

Background and Context

UPI transactions and RuPay debit card payments have been statutorily free of MDR since 2020, a combination of a Payment and Settlement Systems Act, 2007 mandate and Section 269SU of the Income Tax Act, 1961, which requires large businesses to offer specified low-cost digital payment modes without passing on charges. Every other digital payment instrument already attracts MDR, 0.4-0.9% for non-RuPay debit cards, 1.5-2.2% for domestic credit cards, a flat Rs 10-25 fee for netbanking (not a percentage), and 3-4.5% for international credit cards, a differential that has always meant UPI’s “free” status was a policy choice, not a cost-free technical reality.

To sustain zero-MDR UPI at small merchants, the government launched the Incentive Scheme for Promotion of Low-Value BHIM-UPI Transactions (Person-to-Merchant) in December 2021, subsidising banks for UPI transactions below Rs 2,000. This subsidy rose from Rs 1,389 crore in 2021-22 to Rs 3,631 crore in 2023-24, before falling to a budgeted Rs 2,000 crore for 2026-27, even as UPI transaction volumes have continued to expand nationally, a gap between rising volume and shrinking per-transaction subsidy that frames the current legislative change.

The Taxation and Other Laws (Amendment) Bill, 2026 was passed by the Lok Sabha on August 6, 2026, by voice vote amid Opposition sloganeering during the Monsoon Session, and now moves to the Rajya Sabha. It amends the Payment and Settlement Systems Act, 2007 to let the government notify categories of transactions, rather than mandating a blanket zero-MDR rule, that may attract a charge. Government sources indicate the intended design targets merchants with annual turnover above roughly Rs 1-1.5 crore and transactions exceeding Rs 2,000 in value, at a proposed 0.25-0.4% MDR, which officials estimate would exclude about 95% of current UPI transaction volume. RBI Governor Sanjay Malhotra, speaking at the August 5, 2026 post-Monetary Policy Committee press conference, said “someone will have to pay the cost” of the digital payments infrastructure, noting the burden currently falls diffusely on banks, processors, and indirectly on the wider economy. Finance Minister Nirmala Sitharaman has said final rates are undecided and framed the change as enabling investment in infrastructure, innovation and security that would ultimately benefit all UPI users.

The Analysis

1. The legislative change is broader than the policy intent, and that gap is the source of public anxiety. The Bill’s text is permissive, it lets the government notify any UPI transaction category for MDR, without embedding the 95%-exclusion design, the Rs 1-1.5 crore turnover threshold, or the Rs 2,000 transaction floor in the statute itself. Reassurance currently rests entirely on government statements of intent, not on binding legislative text.

2. “Free” UPI was always a subsidised, legally engineered outcome, not a natural market price. The Incentive Scheme’s cost trajectory, rising through 2023-24 and then falling even as volumes grew, shows the fiscal support underwriting zero-MDR UPI has been under strain for at least two budget cycles before this amendment, making the timing less surprising than the headline suggests.

3. The proposed MDR band is deliberately calibrated below card-payment rates. At 0.25-0.4%, the proposed UPI MDR sits well under even the cheapest existing MDR category (non-RuPay debit cards at 0.4-0.9%), suggesting a design intent to recover cost proportionately from merchants best positioned to absorb it, large-turnover businesses on higher-value transactions, rather than to bring UPI to cost parity with other instruments.

4. Digital financial inclusion remains a genuine constraint on how far this can go. UPI’s near-universal adoption among India’s small merchants and low-income users is a flagship achievement of the government’s Digital Public Infrastructure programme; a broad-based MDR that pushed transaction volumes back toward cash would directly undercut a policy priority the same government has invested in for a decade, giving the “keep 95% free” design real political and economic logic, not just messaging convenience.

5. The counter-argument on pass-through cost deserves weight. Every other MDR-bearing payment instrument shows merchants routinely pass some or all of the charge to consumers through pricing, and there is no structural reason large-merchant UPI transactions would behave differently, meaning even a narrowly targeted MDR will likely reach some consumers indirectly, just not through a line-item charge on the transaction itself.

6. The durability question is unresolved by design, not by oversight. Because the actual MDR thresholds will be set by executive notification rather than by the statute, a future government facing fresh fiscal pressure could lower the turnover or transaction-value thresholds without returning to Parliament, a structural vulnerability the current reassuring 95%-exclusion figure does nothing to prevent.

Data and Institutions Vault

Prelims-grade facts:

• UPI/RuPay MDR exemption: in force since 2020, under Payment and Settlement Systems Act, 2007 read with Section 269SU, Income Tax Act, 1961
• Existing MDR bands: non-RuPay debit cards 0.4-0.9%; domestic credit cards 1.5-2.2%; netbanking a flat Rs 10-25 fee (not percentage-based); international credit cards 3-4.5%
• Incentive Scheme for Promotion of Low-Value BHIM-UPI Transactions: launched December 2021; subsidy Rs 1,389 crore (2021-22) to Rs 3,631 crore (2023-24) to a budgeted Rs 2,000 crore (2026-27)
• Taxation and Other Laws (Amendment) Bill, 2026: passed Lok Sabha, August 6, 2026; amends Payment and Settlement Systems Act, 2007
• Proposed MDR design (government sources, not yet notified): 0.25-0.4%, merchants above Rs 1-1.5 crore turnover, transactions above Rs 2,000; estimated to exclude ~95% of current UPI volume
• RBI Governor Sanjay Malhotra: “someone will have to pay the cost,” remarks at post-MPC press conference, August 5, 2026
• Finance Minister Nirmala Sitharaman: final MDR rates not yet decided as of the Bill’s passage

Watch the trap: do not write that the 2026 amendment itself imposes an MDR on UPI. The Bill only empowers the government to notify such a charge; the specific rate, thresholds, and effective date all depend on a subsequent executive notification that had not been issued as of this edition.

The Debate

Argument FOR the amendment as sound, targeted policy. UPI’s zero-MDR status has been fiscally subsidised since 2020, and that subsidy has visibly shrunk even as transaction volumes grew, an unsustainable trajectory. A narrowly designed MDR, at rates well below every comparable payment instrument and excluding an estimated 95% of transaction volume, recovers cost from large merchants best able to absorb it without disturbing the small-value, small-merchant transactions that matter most for financial inclusion.

Argument AGAINST treating this as a contained, low-risk change. The statute grants broad, undefined notification power without embedding the reassuring thresholds in law, meaning the actual protection for small users rests on executive discretion and political commitment, not legal guarantee. Combined with the historical pattern of merchants passing MDR costs to consumers, the “no charge on users” framing may understate how much of this cost eventually reaches ordinary UPI users indirectly, through prices, regardless of the transaction’s own fee status.

Balanced verdict. The government’s stated design is genuinely narrow and consistent with protecting financial inclusion, but the statute’s breadth means that design is a policy commitment, not a legal floor. The debate is less about whether MDR on large-merchant UPI transactions is justified, the fiscal case is reasonably strong, and more about whether Parliament should have written the thresholds into the law itself rather than delegating the entire calibration to executive notification.

How to Think About This

The transferable pattern: when a law grants broad permissive power but the government defends it by pointing to a narrow, undocumented intended use, treat the gap between the statute’s scope and the stated intent as the actual site of the policy risk.

A law that says “the government may notify X” is functionally different from a law that says “the government may notify X, subject to thresholds A, B and C.” The first form places all the protective detail in a policy announcement that can change without further legislative scrutiny; the second locks the protective detail into the text itself. Recognising which form a given law takes, and asking why the more binding form was not chosen, is a reusable diagnostic for any delegated-legislation question.

This same structure recurs in India’s data protection framework, where the Digital Personal Data Protection Act, 2023 delegates substantial detail to rules notified later by the executive; in GST rate-setting, where the GST Council recommends rates that Parliament does not vote on individually; and in the telecom sector’s spectrum-pricing and licensing conditions, routinely set by executive notification under the Telecommunications Act rather than fixed in the parent statute.

Diagram-in-Words

Takeaway Box

Lift line for an answer:

UPI was never free, it was subsidised and legally shielded; the 2026 amendment removes the shield from the transactions the subsidy was already struggling to cover.

Prelims hooks: Payment and Settlement Systems Act, 2007; Section 269SU, Income Tax Act, 1961; Incentive Scheme for Promotion of Low-Value BHIM-UPI Transactions (Dec 2021); Taxation and Other Laws (Amendment) Bill, 2026 (Lok Sabha, 6 August 2026); MDR bands across payment instruments; RBI Governor Sanjay Malhotra; FM Nirmala Sitharaman.

Ethics and interview angle: is it good governance to write broad, permissive delegated-legislation power into a statute while relying on unlegislated government assurances to protect the intended beneficiaries, or should Parliament insist the protective thresholds be written into the law itself?

PYQ linkage: UPSC has tested Digital Public Infrastructure and financial inclusion policy (GS3) repeatedly; this explainer supplies the specific fiscal and legal mechanics, subsidy trends, MDR bands, delegated notification power, that a strong Mains answer on DPI sustainability should now be able to cite.

Probable question: “UPI’s zero-MDR status was a subsidised and legally engineered outcome, not a natural market price.” Examine this statement with reference to the Taxation and Other Laws (Amendment) Bill, 2026, and discuss its implications for India’s Digital Public Infrastructure objectives.

Sources: The Hindu, PRS India, Business Standard, Inc42

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