End of Free UPI? MDR Charges Poised for a Comeback

Yes, you read that right. India’s most popular digital payment system, the Unified Payments Interface (UPI), which has dramatically overtaken credit cards, debit cards, and mobile wallets in recent years, may no longer remain free.

The Payments Council of India (PCI), an industry body representing over 180 non-banking payment companies, has proposed the reintroduction of the Merchant Discount Rate (MDR) on UPI and RuPay debit card transactions. The proposal gained momentum this week as the Startup Policy Forum (SPF) became the latest industry association to endorse it.

Given UPI’s widespread adoption, this move could have a significant impact on India’s digital payment ecosystem. In February 2025 alone, UPI facilitated 16 billion transactions worth nearly ₹22 lakh crore, according to data from the National Payments Corporation of India (NPCI).

Why Might UPI Transactions No Longer Be Free?

What is UPI?
Unified Payments Interface (UPI) is a real-time digital payment system that enables instant interbank transactions. Introduced to promote a cashless economy, UPI has become the backbone of India’s digital payments landscape by offering a single, secure, and interoperable platform for instant fund transfers.

Were UPI Transactions Always Free?
Not initially. To incentivize digital payments, Finance Minister Nirmala Sitharaman announced in December 2019 that no MDR charges would be levied on UPI and RuPay transactions starting January 1, 2020.

Prior to this policy, merchants typically paid less than 1% of the transaction amount as MDR to banks. After the exemption, banks and payment service providers such as Google Pay, PhonePe, and Paytm processed UPI transactions without charging fees—partially compensated by government subsidies.

To encourage small-ticket transactions, the government launched an incentive scheme in March 2019, offering a 0.15% subsidy on transactions below ₹2,000. This subsidy was split among the issuing bank, acquiring bank, payment gateway, and app provider.

What is MDR?

The Merchant Discount Rate (MDR) is a fee paid by merchants to banks or payment service providers for processing digital transactions. For card-based payments in India, MDR typically ranges between 1% and 3% of the transaction amount. However, it is currently set at zero for UPI and RuPay debit cards.

For example, if you pay ₹5,000 using a credit card with a 2% MDR, the merchant would pay ₹100 to the payment facilitator. With UPI, merchants currently pay nothing.

Why is the Industry Demanding a Return of MDR?

The payments industry has flagged concerns about the long-term financial sustainability of zero-MDR UPI transactions. Government incentives that once helped offset operational costs have been significantly reduced—from ₹3,500 crore in FY24 to just ₹1,500 crore in FY25.

Industry stakeholders argue that this amount is insufficient, covering only a fraction of the ₹10,000 crore estimated annual cost needed to maintain and expand UPI services.

Sustained growth in digital payments, they say, requires continuous investment in areas such as merchant onboarding, cybersecurity, compliance, and IT infrastructure. A regular inflow of funds through MDR could help support these investments.

The Payments Council of India has proposed a nominal MDR of 0.3% on UPI and RuPay debit card payments—but only for large merchants who already pay MDR fees on other platforms and are capable of absorbing similar charges.

The proposal aims to create a level playing field by aligning UPI and RuPay with other digital payment instruments.

What Happens If MDR on UPI is Reintroduced?

If the government approves the MDR reinstatement, merchants may pass the cost on to consumers—either by increasing product prices or directly adding a surcharge for UPI payments.

Alternatively, merchants unwilling to absorb or pass on the cost might revert to promoting cash payments, potentially slowing India’s momentum toward a digital economy.