Proposed changes to India's payment laws could allow merchant fees on select high-value UPI transactions, while consumer payments are expected to remain free. (Image created using AI for representational purposes)

UPI payments above Rs 2,000 may soon attract a fee under proposed law change

The government has proposed changes to the law that could allow merchant charges on select UPI payments in the future. If approved, high-value transactions above Rs 2,000 made to large businesses may be the first to attract an MDR, while consumers are likely to remain unaffected.

by · India Today

In Short

  • UPI payments above Rs 2,000 may attract up to 0.5 percent MDR under proposal
  • Large merchants could be charged, consumers likely to continue paying nothing
  • Law amendment creates legal basis; final decision on fees is yet to be taken

India's free UPI payment system could be heading for its biggest policy change in years. The government has introduced amendments to the Payment and Settlement Systems Act in Parliament that could allow merchant charges on select UPI transactions in the future. While no fee has been approved yet, the proposed legal change has opened the door for introducing a Merchant Discount Rate (MDR), something the payments industry has been demanding for years to support further growth of the digital payments ecosystem.

The amendment, tabled by Finance Minister Nirmala Sitharaman, does not immediately impose any charges. Instead, it creates the legal framework that would allow the government to introduce MDR if it decides to do so later. According to a Reuters report, officials are still discussing how the fee could be implemented and no final decision has been taken on the rate or the transactions that would be covered.

One of the proposals under consideration is to levy an MDR of 0.3 percent to 0.5 percent on UPI transactions above Rs 2,000. However, the charge is expected to apply only to merchants with an annual turnover of more than Rs 1.5 crore. This means consumers are unlikely to pay anything extra, while small businesses may continue to enjoy fee-free UPI transactions.

Another option being discussed is to determine the fee based on a merchant's annual turnover instead of the value of individual transactions. Policymakers are exploring different approaches to ensure that if MDR is introduced, the burden falls mainly on larger businesses rather than neighbourhood shops and small retailers.

An MDR is a fee paid by merchants to banks and payment service providers for processing digital payments. Unlike UPI, merchants already pay processing charges on card payments. Businesses typically pay around 1.5 percent on credit card transactions, while debit card payments can attract lower fees depending on the bank and payment network. UPI has been exempt from such charges, making it an attractive payment option for both merchants and customers.

Why the proposal is being discussed

The report says that the industry executives have repeatedly said that offering UPI services without any merchant fee has made it challenging to build a sustainable business model. Since they do not earn from processing UPI transactions, industry players believe their ability to invest in new technology, strengthen payment infrastructure and expand services is limited. A limited MDR on high-value transactions, they argue, could help support the long-term growth of India's digital payments ecosystem.

The proposal comes at a time when UPI continues to break records. Official data shows the platform processed 23.6 billion transactions worth Rs 29.9 trillion in July alone, making it one of the world's largest real-time payment systems. Apps such as PhonePe and Google Pay continue to dominate UPI transactions across the country.

Although transactions worth more than Rs 2,000 represent only a small share of overall merchant UPI payments, they contribute a significant portion of the total transaction value. According to an analysis by Jefferies, these payments account for about 67 percent of the value processed through merchant UPI despite making up just 4 percent of transaction volume. The brokerage believes charging MDR on this segment could unlock an annual revenue opportunity of Rs 5,000 crore to Rs 10,000 crore for the digital payments industry, benefiting players such as Paytm and Pine Labs.

At the moment, the proposal remains only a legal enabling provision. The government has not announced whether MDR will be implemented, what the final rate will be, or when any such change could come into effect. Until a final decision is made, UPI payments will continue to remain free under the existing system.

- Ends