India’s UPI system has become the backbone of the country’s retail digital economy, but government officials are now examining a framework that could introduce merchant discount rates for large transactions to sustain its infrastructure, sparking debate over future funding and international implications.
India’s UPI system has moved from caution to ubiquity in a decade, becoming the default way millions of people pay for everything from vegetables to online shopping. During the pandemic lockdowns, its role widened sharply as contactless payments became a practical necessity, and the platform has since grown into the backbone of the country’s retail digital economy. Government backing was central to that expansion, especially after the zero-MDR policy made UPI and RuPay debit card transactions free for users and merchants alike.
That same policy is now under pressure. The debate in New Delhi is no longer about whether UPI should remain free for consumers , officials have repeatedly said it should , but about who should bear the cost of maintaining the infrastructure behind it. According to the report by Aaj Tak, the government is examining a framework that could allow a merchant discount rate, or MDR, on selected large-value transactions, while keeping small merchant and person-to-person payments exempt.
Finance minister Nirmala Sitharaman has said in Parliament that any MDR, if introduced, would fall on merchants rather than ordinary users and that no final decision has been taken on its scope or rate. Under the proposed structure, the National Payments Corporation of India’s UPI and Services Steering Committee would review the issue. The policy argument is straightforward: banks, payment processors and fintech firms say the current model leaves them carrying server, security and operating costs without a sustainable revenue stream.
That concern is not new. The Economic Times reported that the digital payments industry received about ₹8,000 crore in subsidies over the past four years, even though budget allocations were higher, and that payouts for fiscal 2026 were still pending. Moneycontrol reported that the Union Budget 2026 included a ₹2,000 crore incentive scheme for UPI and RuPay debit card transactions. Separately, the Payments Council of India has warned that each UPI transaction costs about ₹2 to process, making the zero-MDR structure difficult to sustain at current volumes.
UPI’s scale makes the question more urgent. Government data cited by the media showed that UPI accounted for about 81% of India’s retail digital payments in fiscal 2025, up from 7,176.9 crore transactions in fiscal 2022 to 22,167.9 crore in fiscal 2025. That growth has helped deepen financial inclusion, but it has also intensified the strain on the payments ecosystem. Industry estimates quoted by the media suggest that a modest MDR on large merchant transactions could shift substantial revenue to payment aggregators such as PhonePe, Paytm and Google Pay, improving their margins and helping fund further infrastructure investment.
The issue has also taken on an international dimension. The Global Trade Research Initiative has argued that India should not reshape its payment rules under outside pressure, pointing to criticism in the United States Trade Representative’s 2026 National Trade Estimate report of domestic systems such as UPI, RuPay and Brazil’s Pix. Even so, the core domestic argument remains the same: whether India can preserve low-cost digital payments for consumers while finding a durable way to pay for the systems that keep them running.
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