UPI payments may not stay free for long as Union govt proposes major rule change
India's digital payment landscape is on the verge of a significant shift as the Union government moves to change the rules governing the nation's most popular payment system. The Taxation and Other Laws (Amendment) Bill, 2026, was introduced in Parliament by Finance Minister Nirmala Sitharaman. The proposed law effectively clears the legal path to reintroduce fees on transactions made through the Unified Payments Interface (UPI).
The UPI market in India has reached a staggering scale, becoming one of the largest real-time payment networks in the world. In July alone, the system processed 23.6 billion transactions, with the total value crossing ₹29 trillion. While platforms such as PhonePe and Google Pay currently lead the market, the service has remained free for merchants. However, those operating the infrastructure argue that this model is becoming difficult to sustain. Without the ability to earn fees, payment firms claim they lack the necessary funds to continue investing in and expanding the digital ecosystem.
Legal framework for merchant fees
The new Bill seeks to provide a formal legal basis for what is known as the Merchant Discount Rate (MDR). This is essentially a fee that businesses pay to banks and service providers to process digital payments. To achieve this, the government intends to amend the Payment and Settlement Systems Act, 2007. Specifically, the amendment to Section 10A would remove existing restrictions that prevent banks or system providers from imposing charges on specified electronic payment modes. While the Bill creates the legal provision to levy these fees, the exact rates and the transactions to which they will apply have not yet been finalised.
Protecting small businesses and consumers
Despite the move towards charging fees, the government is considering a tiered approach to ensure that the common man and small-scale traders are not burdened. One proposal suggests that fees should apply only to transactions above a certain threshold, such as ₹2,000. Additionally, these charges could be limited to larger merchants with an annual turnover exceeding ₹15 million.
Market analysis indicates that while payments above ₹2,000 account for only four per cent of the total number of transactions, they represent 67 per cent of the total transaction value. Imposing a fee of 0.3 to 0.5 per cent on these higher-value payments could generate a revenue pool of up to ₹100 billion for the industry. The move is expected to benefit major players such as Paytm and Pine Labs by providing a sustainable revenue stream from the vast volume of digital payments processed across the country.