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UPI was built with public money. Why are we paying again?

For years, Indians were encouraged to see UPI as national digital infrastructure: convenient, inclusive, home-grown and free. Citizens changed how they paid, and merchants built QR codes into everyday business.

Now that UPI has become indispensable, the terms are changing.

From 15 October 2026, eligible person-to-merchant payments above ₹2,000 will attract a Merchant Discount Rate (MDR) of 0.4 per cent, capped at ₹300 for transactions of ₹75,000 and above. Person-to-person transfers, merchant payments up to ₹2,000 and qualifying small merchants will remain exempt.

The government says customers will not be charged because merchants must pay the MDR. That is technically correct, but it does not settle who will ultimately bear the cost.

The public has already funded UPI

UPI's growth was supported by public policy, taxpayer-funded incentives and the participation of hundreds of millions of Indians.

Ministry of Finance figures show that the government paid ₹957 crore in UPI incentives in FY2021-22, ₹1,802 crore in FY2022-23 and ₹3,268 crore in FY2023-24. Another ₹1,500 crore was approved for low-value merchant transactions in FY2024-25. That amounts to approximately ₹7,527 crore in UPI-specific public support over four years.

The investment delivered extraordinary results. UPI processed 24,162 crore transactions worth ₹314 lakh crore during FY2025-26. By June 2026, nearly 55.49 crore users had joined the system.

UPI also benefits the state. It reduces dependence on cash, formalises economic activity and creates transaction records that improve financial visibility and tax compliance. Citizens and merchants did not merely use the platform. Their adoption created its value.

Banks, payment applications and service providers will now share the MDR revenue. Brokerage estimates reported by the Financial Express suggest the charge could generate ₹16,000 crore to ₹20,000 crore annually by FY2028. This is potentially a major commercial revenue stream, not a token contribution towards maintenance.

The government says the money is needed for infrastructure, cybersecurity, innovation and customer service. Those are legitimate expenses. But it has not publicly produced a sufficiently detailed, independently audited account of UPI's revenue, expenditure, subsidies and projected funding gap.

NPCI, which operates UPI alongside RuPay, IMPS, FASTag and other services, reported a post-tax surplus of ₹1,552 crore in FY2024-25, according to ICRA. This does not prove that UPI alone was profitable. NPCI's overall surplus cannot be treated as UPI's standalone account.

That distinction strengthens the case for disclosure. Before creating a multibillion-rupee revenue pool, the government should show what UPI costs, how much existing public support covers and why the proposed MDR is proportionate to the shortfall.

Without those figures, “sustainability” remains an assertion rather than a demonstrated financial necessity.

Merchants may be billed, but people will feel the cost

Businesses do not absorb every new expense indefinitely. Even if merchants cannot add a visible UPI surcharge, they can recover the cost through higher prices, smaller discounts, minimum-payment conditions or a preference for cash. Retail organisations have already warned that MDR could push merchants back towards cash, undermining the formalisation UPI helped achieve.

The small-merchant protection also merits scrutiny. Qualifying merchants receiving up to ₹1 lakh a month through UPI remain exempt. That is an average of roughly ₹3,333 a day. A neighbourhood pharmacy, grocery shop or modest restaurant could cross that threshold without earning a large profit. Turnover is not income. Rent, salaries, electricity and inventory must still be paid.

The percentage-based fee raises another question. A ₹3,000 payment attracts MDR of ₹12, while a ₹50,000 payment attracts ₹200. Yet processing the second payment may not cost nearly 17 times as much as processing the first. If the purpose is cost recovery, a fixed fee based on audited processing costs may be easier to justify than a percentage of the purchase value.

Calling MDR “not a tax” is legally accurate but economically incomplete. It is a payment-processing fee rather than a government levy. However, the fee is expected to attract 18 per cent GST, so the state will receive tax revenue from the new arrangement.

UPI requires reliable funding. But the choice is not between MDR and an unfunded system. Core infrastructure could receive transparent Budget support as a public utility. Banks and payment companies could contribute according to the commercial benefits they receive. If merchant charges are unavoidable, they should reflect audited costs, protect genuinely small businesses and be reviewed regularly. GST on the processing fee should also be reconsidered.

Indians trusted UPI, adopted it and funded its expansion through taxes. If that infrastructure is now to generate a large private revenue stream, citizens deserve more than assurances. They deserve to see the accounts.

Sources

  1. Ministry of Finance, Cabinet approves incentive scheme for promotion of low-value BHIM-UPI transactions, 19 March 2025.

  2. Ministry of Finance, Nearly 55.49 crore users onboarded on UPI as in June 2026, 20 July 2026.

  3. Ministry of Finance, UPI continues to remain free for person-to-person transactions and 96% of merchant transactions, 15 September 2026.

  4. Department of Financial Services, Merchant Discount Rate on select UPI person-to-merchant transactions: FAQs, 15 September 2026.

  5. ICRA, National Payments Corporation of India: rating rationale, 23 June 2025.

  6. Reuters, India's UPI fee faces retailer and broker pushback, 16 September 2026.

  7. Financial Express, MDR on UPI could generate revenue of ₹16,000 crore to ₹20,000 crore, 16 September 2026.

  8. Financial Express, UPI MDR to attract 18% GST, 16 September 2026.

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