Rs 15,000 crore: What the UPI levy will fetch, and why the government is backing it

Payments industry players have long been calling for the MDR charge, citing the high costs of running the payments infrastructure. But critics argue that UPI transactions could have continued for free given the benefits for the public at large.

Beginning October 15, UPI payments above Rs 2,000 to merchants will attract a 0.4% levy called the Merchant Discount Rate. MDR is the fee merchants pay to the entities that help facilitate a digital transaction.

The new MDR framework, announced Tuesday, is expected to generate around Rs 15,000 crore, an official linked to the payments platform told The Indian Express. This amount — which will be shared between banks, payment apps and payment service providers — marks the first step in the direction of a levy to be charged through the country’s payment systems for the UPI payment mode that had become almost an equivalent to cash over the last six years.

Banks and other financial players in the payments framework have long been calling for the MDR charge, citing the high costs of running the payments infrastructure. The government has been subsidising payments of up to Rs 2,000 made to small merchants. The incentive was capped at 0.15% of the transaction value for small merchants with turnover less than Rs 50 crore. The government paid a total of Rs 8,730 crore under the incentive scheme between FY22 to FY25.

The government had consistently denied that there was a plan to impose an MDR on UPI. In fact, as recently as June 2025, the Ministry of Finance said in a social media post: “Speculation and claims that the MDR will be charged on UPI transactions are completely false, baseless, and misleading… The Government remains fully committed to promoting digital payments via UPI.”

Now, with the reintroduction of the MDR levy, the cost versus benefit debate is again in focus. To put the numbers in perspective, Rs 15,000 crore accounts for less than 4% of the net profits of all listed commercial banks in India seen in FY26. When seen against the profits earned by the top three lenders — State Bank of India, HDFC Bank and ICICI Bank — the MDR receipts’ would come to be 7% of their combined net profits of Rs 2.13 lakh crore in the financial year 2025-26.

‘Right Step’

Critics argue that UPI transactions could have continued for free given the benefits for the public at large, but officials maintained that this marks a step in the “right direction”. “In my assessment, it is a step towards magnificently changing everything. At the same time it has to be reasonable. Over a period of time, it has to change but this marks a step in the right direction,” the official mentioned above said.

Before the payments framework moved to a zero-MDR regime in January 2020, MDR of up to 0.30% was applicable for UPI P2M (person-to-merchant) transactions. In January 2020, to promote digital transactions, MDR was made zero for RuPay Debit Card and BHIM-UPI transactions through amendments in Section 10A of the Payments and Settlement Systems Act, 2007 and Section 269SU of the Income-tax Act, 1961.

Transactions of more than Rs 2,000 make up just 4% of all payment-to-merchant (P2M) payments in volume terms, but they account for 67% of total value of such payments.

And, as an indication of how deep the unprecedented public adoption has been, UPI processed a whopping 2,451 crore transactions valued at Rs 29.9 lakh crore in August 2026 alone. This immense volume highlights UPI’s role as the main financial engine of the Indian economy, handling hundreds of millions of daily payments.

The argument from NPCI’s end is that the government has been indirectly footing the bill for large merchants, and why to subsidise large merchants such as Amazon or Flipkart, who are already paying MDR at higher rates on payments through other non-UPI digital payment modes — Visa, Mastercard, and American Express cards for instance. Traditional card-based transaction fee typically ranges from 1% to 3% per transaction; debit card MDRs are capped up to 0.90%.

According to critics of the fee, UPI is one of India’s greatest digital achievements and should remain a no-cost public good. That this could potentially reverse the momentum in favour of the digital transition, and force a move towards the cash economy. And the NPCI’s revised MDR framework triggers a wider concern: since the law barring the levy of MDR on UPI transactions is now amended, the government could extend charges to more categories of UPI and RuPay debit-card transactions through notifications — without having to go back to Parliament.

As per the framework issued Tuesday, MDR will be levied if a customer makes a payment to a merchant above Rs 2,000, at a uniform rate of 0.4% (with a few exceptions).

UPI application providers are “expressly prohibited from imposing platform fees or hidden charges”, the Finance Ministry said. The government has meanwhile “advised” banks to ensure that merchants do not pass MDR charges to customers. Despite that, there is a strong likelihood that merchants — particularly those that are relatively small or in the informal sector — will pass the incidence or simply ask for cash.