The government should withdraw the proposed changes to UPI payments, scheduled to take effect on October 15, and keep UPI free for merchants and consumers, trade thinktak GTRI has urged. 

It said that charging merchants could raise prices, squeeze small-business earnings and weaken household demand. It would also reduce UPI’s price advantage over cards.

Under the proposed changes, specified UPI payments above ₹2,000 would attract a Merchant Discount Rate (MDR). The stated purpose is to fund the operation, security and expansion of the system.

Banks, Payment Apps Should Share Costs
Banks save on handling cash and operating ATMs and branches when customers use UPI, GTRI said in a report, adding that payment apps benefit by gaining customers, and spending data and opportunities to sell loans, insurance and mutual funds in a market serving more than 550 million Indians. The government also benefits from wider digital payments and greater visibility of economic transactions.

These benefits support the case for sharing the running costs for UPI. 

The US Trade Representative’s 2026 National Trade Estimate Report criticised India’s digital-payment rules as favouring domestic providers and sought a level playing field for US payment companies. Visa and Mastercard could benefit when UPI loses part of its price advantage. Free UPI allows merchants to receive the full payment and an MDR reduces that benefit and could make cards more competitive. 

PhonePe and Google Pay, which together handle more than 80% of UPI transactions, could earn a share of merchant fees if the fee-sharing arrangement provides for it. Their market dominance would give them a large potential base for such earnings.

Exempting payments below ₹2,000 would protect those transactions from a direct fee, but it would not protect consumers from costs passed through shop prices and supply chains. Shopkeepers may recover MDR on larger bills by raising prices, GTRI opined. The 18% GST on MDR adds another cost. Eligible GST-registered firms may claim input tax credit, but unregistered businesses and composition taxpayers cannot. For them, GST on the fee becomes an expense to absorb or pass on.

Under the proposed classification rules, a small merchant account could become eligible for MDR when monthly UPI receipts exceed ₹1 lakh for three consecutive months. This threshold may appear high, but receipts are not profit. At a 20% profit margin, monthly sales of ₹1 lakh leave only ₹20,000 for food, rent, electricity, school fees and other family expenses. A vendor relying mainly on UPI could cross the threshold while earning barely enough to support a household.

Crossing the threshold would not make every payment chargeable; MDR would apply to eligible transactions above ₹2,000. Even so, these charges could squeeze earnings already under pressure from higher supply-chain costs. 

Annual UPI payment value exceeded 91% of India’s GDP last year, indicating the system’s reach. The proposed fees could therefore affect the economy beyond the transactions directly charged.