UPI Charges Explained: What Users Need to Know
UPI payments are currently free, but a proposed amendment could allow charges on some high-value business transactions in the future. Read the entire blog to see what this will mean for customers and companies.
MARKET NEWS
8/7/20265 min read
Unified Payments Interface (UPI) is now one of the most common ways to send and receive money in India. People use it to shop, pay bills, send money to family members, and make online purchases. Until now, most UPI payments have been free for both customers and merchants. However, a recent law change has raised questions about whether UPI payments would come with costs in the future.
What has changed?
The Lok Sabha passed a bill to alter the Payment and Settlement Systems Act of 2007. The proposed amendment would allow the government to determine whether banks and payment service providers can charge fees for UPI and other notified digital payment mechanisms. Currently, the act prohibits such providers from imposing fees on certain digital payments, including UPI. The Bill alters this legal situation, although it does not automatically impose a tax on all UPI transactions.
Will users have to pay for UPI payments?
UPI payments are currently free. Finance Minister Nirmala Sitharaman has stated that if a Merchant Discount Rate, or MDR, is implemented, it will apply only to merchants, not regular users or customers. She has also stated that no final decision has been made on implementing MDR and that the UPI and Services Steering Committee, led by NPCI, will determine the next steps once the legal procedure is concluded.
This means you can keep utilising UPI for regular payments without worrying about an immediate transaction cost. It is yet unclear whether a fee will be implemented later, which transactions it would apply to, and how much it will cost. The change just establishes the legal basis for a potential future charge.
What is MDR?
MDR stands for Merchant Discount Rate. A merchant pays a tiny fee when a customer makes a digital payment. For example, if a customer pays a large retailer using UPI, banks, payment companies, and other service providers may receive a tiny percentage of the transaction value to execute the payment. This charge differs from a fee paid directly from the customer.
The government and payment industry are considering MDR because banks and fintech companies want funds to maintain payment systems, enhance technology, prevent fraud, and handle an increasing volume of digital transactions. According to the Finance Minister, such revenue might encourage banks and fintech companies to invest more in payment infrastructure, innovation, and security.
Which UPI payments could be affected?
There has been no final list of transactions announced. One option being discussed is to charge an MDR of 0.3% to 0.5% on UPI payments exceeding ₹2,000 made to larger merchants. This suggestion may only apply to enterprises with an annual turnover more than ₹1.5 crore. Another option is to tie the charge to the merchant's annual revenue or to impose a fee cap. These are simply ideas and should not be considered final rules.
Large-value merchant payments account for a tiny proportion of total UPI transactions but make up a considerable fraction of total transaction value. As a result, governments may prioritize high-value payments to major enterprises over little payments made at neighborhood shops.
What does this means for small shops?
Small stores and local shopkeepers may be unaffected if the final guidelines only apply to major merchants or businesses with a specified turnover cap. However, the exact eligibility requirements have not yet been disclosed. Small businesses should wait for the final notification before adjusting prices or adding any UPI-related fees to consumer bills.
Merchants should also avoid charging clients simply because they've heard about a potential MDR. UPI payments should continue to be made using the current system until the government and NPCI release final rules. Any fees, if implemented, must conform to the specified terms and conditions.
Will person-to-person transfers also be charged?
The proposed discussion focuses on merchant payments, which include payments made to stores, online platforms, retailers, and service providers. Personal transfers between friends, family members, or people are normally not liable to a merchant charge. However, the final notification will provide accurate details, so people should rely on official announcements rather than social media postings or relayed claims.
Why is the government considering these changes?
UPI has grown rapidly, necessitating investments in servers, cybersecurity, customer service, fraud prevention, and technical improvements. Currently, service providers do not earn MDR from basic UPI transactions. The government and business agree that a sustainable revenue model will be required to maintain and develop the payment system as usage grows. The RBI Governor has also stated that payment infrastructure needed investment, but the exact form of funding is still being discussed.
What should UPI users do now?
There is no need to stop using UPI or change your usual payment methods. Continue to double-check the recipient's name before confirming a payment, and never share your UPI PIN or OTP. Only use trusted payment applications.
Do not believe communications saying that every UPI payment will immediately come with a cost, as no such universal charge has been published.
Bottom line
The most recent UPI adjustment is mostly a legal and policy issue, not an immediate fee for users. The Lok Sabha has enacted a Bill that could give the government the authority to enable MDR on certain digital payments in the future, although UPI remains free for the time being. Any future charge will be determined separately by the government and the NPCI, and current indications are that normal users would not be directly affected.
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