New Delhi: The Government of India has clarified that digital payments made through the Unified Payments Interface (UPI) will continue to remain free for users, even as it considers introducing a nominal Merchant Discount Rate (MDR) on select merchant transactions in the future.

The statement comes shortly after the passage of amendments to the Payment and Settlement Systems Act, 2007 in the Lok Sabha, enabling the government to authorise banks and payment service providers to levy charges on UPI and other notified electronic payment modes.

The Finance Ministry emphasised that Person-to-Person (P2P) transactions will remain completely free, ensuring that everyday users can continue sending and receiving money without incurring any charges. It also noted that the vast majority of merchant payments will continue to be exempt from fees.

MDR likely only for select merchant transactions

According to the government, any potential MDR charges will be applied selectively and only to a limited set of merchant transactions above a defined threshold. Officials indicated that these charges, if implemented, would be nominal and significantly lower than those currently applicable to debit and credit card payments.

The ministry stressed that the proposed framework would be threshold-based rather than universal, meaning small businesses, street vendors and low-value transactions are unlikely to be impacted.

This move is being positioned as a calibrated approach to balance affordability for users with the need to sustain the rapidly expanding digital payments ecosystem.

Why the government is amending the law

The government said the amendment to the Payment and Settlement Systems Act is primarily an enabling provision designed to ensure the long-term sustainability of UPI.

Officials highlighted that the exponential growth in UPI transactions has led to increased demand for investments in cybersecurity, fraud detection systems and infrastructure upgrades. Maintaining a robust and secure payment network requires continuous financial support, which cannot rely solely on government subsidies.

The government also stated that introducing a limited MDR framework could encourage greater participation from private players, fostering competition and innovation in the digital payments sector.

By creating a self-sustaining revenue model, authorities aim to ensure that India’s digital payments infrastructure remains resilient, inclusive and capable of supporting future growth.

Political debate over impact on consumers

The proposal has triggered a political debate, with opposition leaders raising concerns about its potential indirect impact on consumers. Senior Congress leader Jairam Ramesh criticised the government’s position, arguing that even if MDR is charged only to merchants, the cost is likely to be passed on to customers.

He pointed out that merchants—including small shopkeepers, kirana stores and street vendors—may adjust prices to offset transaction costs, similar to practices seen with card payments.

Ramesh also questioned the adequacy of government assurances, stating that policy safeguards should be embedded in law rather than communicated through statements or social media.

Government rejects claims of external pressure

Responding to criticism and speculation, the Ministry of Finance firmly rejected claims that the proposed changes were influenced by external entities. It described such reports as “unfounded, completely false and misleading”.

The government reiterated that UPI is an indigenous innovation introduced in 2016 and has been free for both users and merchants since January 2020. It maintained that its policy decisions are guided solely by domestic priorities and the need to strengthen India’s financial ecosystem.

Officials underscored that the objective is to maintain a balance between accessibility and sustainability, ensuring that UPI continues to serve as a backbone of India’s digital economy without placing undue burden on users.

Conclusion

The government’s assurance that UPI will remain free for users is likely to provide relief to millions who rely on the platform for daily transactions. At the same time, the proposed introduction of limited MDR on select merchant transactions reflects an effort to build a sustainable financial model for the future.

As discussions continue and implementation details emerge, the challenge will be to preserve UPI’s accessibility while ensuring that the ecosystem remains robust, secure and capable of supporting India’s rapidly growing digital payments landscape.