The jeweller told her the charge was to cover the fee he had to pay on card transactions. There was no such charge for UPI payments. This distinction, however, could change if a Merchant Discount Rate (MDR) is introduced on UPI transactions.

Samkit Jain, who runs a mobile store in Hubballi, fears that introducing a charge on UPI transactions could push customers back to cash. For retailers like him, the concern is that even a small additional cost could make customers think twice about using digital payments.

"Nearly 70% of our transactions are now through UPI. If merchants are not allowed to pass on the MDR to customers, we will have to absorb the additional cost, further squeezing our already thin margins," said Nikhil Jain, who runs a computer shop at IT Park in Hubballi.

UPI and RuPay debit card transactions have been under a zero-MDR regime since January 2020. This means neither the customer nor the merchant bears the MDR typically levied on other payment instruments, such as credit and debit cards, to compensate banks and other participants in the payment ecosystem.

An amendment to the Payment and Settlement Systems Act, 2007, passed by the Parliament earlier this month, seeks to change the zero-MDR system. The amendments, introduced as part of the Taxation and Other Laws (Amendment) Act, 2026, received presidential assent on August 17. The zero-MDR framework has been replaced with a notification-based system, allowing the government to introduce charges on specific digital payments through notification.

Though the government has not announced any immediate plan to impose MDR on UPI transactions, the amendment has fuelled speculation that the zero-MDR regime could soon be revisited. Industry stakeholders and merchants fear that introducing a charge may be only a matter of time, particularly as the cost of processing the rapidly growing volume of UPI transactions continues to rise. Any such move, however, could have wider implications for consumers and merchants, who have come to rely heavily on UPI for its convenience and zero-cost transactions.

According to the Union Finance Ministry, the amendment is an "enabling provision designed to ensure UPI's long-term sustainability, technological advancement and resilience against emerging risks."

The ministry has clarified that consumers will not face any transaction charges. All person-to-person transactions will continue to be free. "As and when MDR charges are introduced, they will apply only to a limited set of merchant transactions, above a certain threshold, at a nominal rate, far lower than debit or credit card MDRs," the ministry said.

It is widely speculated that the government may impose MDR on transactions above Rs 2,000. The Rs 2,000 threshold has been used under the incentive scheme to promote UPI and RuPay debit card payments.

In December 2021, the Union Cabinet approved an incentive scheme to promote RuPay debit cards and low-value UPI transactions, defined as transactions of up to Rs 2,000.

Under the scheme called 'Incentive Scheme for promotion of low-value BHIM-UPI transactions Person to Merchant (P2M)', transactions of up to Rs 2,000 qualified for an incentive of 0.15% of the transaction value.

While around 96% of UPI transactions by volume fall into the low-value category, nearly 70% of the total transaction value comes from payments above Rs 2,000. Since MDR is typically calculated as a percentage of transaction value, even a charge on the 4% of transactions above the threshold could generate significant revenue.

"Even a small MDR of 0.25-0.4% on business payments above Rs 2,000 could weaken UPI's main advantage: free and easy payments. Small merchants may pass the fee to customers, discourage UPI payments or return to cash," said Ajay Srivastava, founder of the Global Trade Research Initiative (GTRI).

Cost of handling cash

Printing and handling of cash cost thousands of crores of rupees to the exchequer every year. The Reserve Bank of India incurred an expenditure of Rs 4,875.2 crore on security printing of banknotes during the year 2025-26, as per the Reserve Bank of India's (RBI) annual report for 2025-26 released in May. In the financial year 2024-25, this cost was even higher at Rs 6,372.8 crore. It stood at Rs 5,101.4 crore in 2023-24. The costs involved buying paper, ink, use of printing machines, storage, workers and transportation. Apart from this, businesses also incur significant costs on handling cash.

"Since handling cash is far more expensive than annual UPI infrastructure costs, pushing people back towards cash would make little economic sense," said Srivastava.

"UPI should remain free, with its costs covered by the government or through fees charged to large payment platforms," he added.

The average annual cost to the exchequer in maintaining zero-MDR system for UPI has been around Rs 2,000 crore. This is much lower than the cash handling cost.

Srivastava suggested that UPI should be treated as an essential public good, like government hospitals, roads, bridges and currency. "India can easily afford the roughly Rs 2,000-2,500 crore needed annually to maintain the zero-charge system, especially when UPI generates much larger benefits by reducing cash use, increasing financial inclusion, formalising the economy and improving tax compliance," he said.

The Centre's budgetary support for UPI incentives stood at Rs 8,276 crore between FY 2021-22 and 2024-25. The government incentive disbursements stood at Rs 1,389 crore in 2021-22. It increased to Rs 2,210 crore in 2022-23 and Rs 3,631 crore in 2023-24. In 2024-25, it stood at Rs 1,046 crore. These disbursements supported banks, payment system operators and app providers in scaling low-value digital transactions across the country.

Impact on MSMEs

UPI has played a vital role in formalising small businesses by replacing cash transactions with traceable digital payments.

"UPI's real contribution to India's MSME ecosystem should not be measured only by the number or value of transactions. Its deeper impact lies in bringing even the smallest entrepreneur into a more visible and disciplined business ecosystem," said Lakshmi Venkataraman Venkatesan, Founding and Managing Trustee, Bharatiya Yuva Shakti Trust that supports young entrepreneurs through mentoring and funding.

For nano and first-generation entrepreneurs, moving from cash-led transactions to a digital trail can improve record-keeping, provide greater visibility of business activity and strengthen financial discipline. With Micro, Small and Medium Enterprises (MSME) accounting for nearly 31.1% of India's GDP and 48.58% of exports, strengthening digital capabilities will be essential to sustaining their progress in the next phase of UPI.

"Sustainability of the payment ecosystem must go hand-in-hand with inclusion, ensuring that changes in cost in merchant discount rate do not weaken the low-friction access that has enabled grassroots entrepreneurs to adopt digital payments," Lakshmi said.

A study by an independent third-party research agency, conducted in consultation with the National Payments Corporation of India (NPCI) and released in February this year, shows the striking penetration of UPI among small merchants: 94% of those surveyed had adopted the payment system by FY 2024-25, less than a decade after its launch in 2016.

The study also found that 72% of merchants were satisfied with digital payments, citing faster transactions, better record-keeping and greater operational convenience, while 57% said digital payments had helped boost sales.

Nawaz, who runs a chain of salons in Hyderabad, said digital payments have brought greater transparency to his business. They also make it easier to track daily collections, reconcile transactions and maintain a more accurate account of earnings.

"With UPI, all payments are deposited directly into the bank accounts, and the next day I get an email statement of the transactions. That way, staff do not have to handle cash at all. It is such a relief, especially when you have multiple outlets and other businesses to manage," he said.

Binu P S, who runs an automobile-related business in Thiruvananthapuram, said one of the biggest advantages of UPI was eliminating the risk of accepting counterfeit currency.

"Earlier, we would occasionally receive fake notes without realising it. They would be detected only when we deposited the cash in the bank and the loss had to be borne by us. With UPI, that risk is completely avoided. That is one of the reasons we now prefer digital payments over cash," he said.

The government has described the move away from the zero-MDR regime as an enabling provision aimed at ensuring UPI's long-term sustainability, supporting technological advancement and strengthening the payments ecosystem against emerging risks.

Sustainability

Introduced in 2016, UPI has grown into the world's largest real-time payment system, processing more than 2,300 crore transactions a month. In July alone, it processed 2,366 crore transactions worth Rs 29.9 lakh crore. UPI is now used in 11 foreign countries as well, while several others have expressed interest, according to the Union Finance Ministry.

Keeping the system running requires continuous investment in fraud detection, cybersecurity, network infrastructure, device security, as well as round-the-clock monitoring and incident response. None of this comes cheap. A Parliamentary Standing Committee has estimated the industry's annual operating costs at around Rs 20,700 crore, against a government allocation of around Rs 2,000 crore.

The committee has warned that such a wide funding gap could constrain investment in cybersecurity, fraud prevention and payment infrastructure. And when those investments are squeezed, the risks may remain invisible - until a security failure exposes them.

Srinivas L, Joint Managing Director of Mumbai-based cybersecurity solutions provider 63SATS Cybertech, said the nature of fraud in the digital payments system has been changing.

"Criminals are no longer breaking the system when it comes to UPI, instead, they are talking to the customer, like fake collect requests, QR swaps, digital arrest calls and now AI-cloned voices. The weakest point today is the person holding the phone, not the protocol that runs it," said Srinivas.

"So whichever route is chosen, MDR at higher thresholds or a tapering of incentives, one principle should be non-negotiable. A defined share of that revenue must be ring-fenced for fraud prevention and consumer protection, rather than left to individual players' discretion," he added.

Rohit Taneja, co-founder and CEO of fintech firm Decentro, said the debate around MDR should no longer be framed as a "free versus paid" system, but as "sustainable versus unsustainable" infrastructure.

"Any move, however, must remain sharply targeted, keeping individuals and small merchants outside its ambit. India's next chapter in digital payments will be defined not just by adoption, but by ensuring the infrastructure can sustainably support the scale it has achieved," Taneja said.

The challenge, then, is to strike a balance between keeping UPI affordable and frictionless for users and ensuring that the infrastructure powering it remains financially sustainable and secure. A poorly designed MDR could erode the very convenience that made UPI ubiquitous, particularly for small merchants and low-value transactions.

But continuing with a zero-charge model without adequately funding the ecosystem could also create vulnerabilities as transaction volumes and fraud risks rise. The real test for the government will be to ensure that, whatever model it chooses, UPI does not lose either of the qualities that made it a global success: universal access and public trust.

(With inputs from Arjun Raghunath in Thiruvananthapuram, Pavan Kumar H in Hubballi and SNV Sudhir in Hyderabad)