India’s journey in developing its national highways is a tale of transformation, illustrating how extensive public infrastructure can unify a fragmented economy. These highways, funded by toll collections, did more than connect cities; they revolutionized trade, broadened market access for businesses, and brought disparate economic regions together. In recent years, another transformative force has emerged in the form of financial technology, particularly the Unified Payments Interface (UPI).
UPI has been pivotal in transitioning India’s financial transactions to a digital format, offering a cashless, swift, and cost-effective alternative that has drawn the country’s vast informal sector into the formal economy. The platform’s success lies in its convenience—an essential quality that has unified economic activities across the nation. Similar to how credit and debit cards have been embraced despite transaction fees, due to their efficiency, UPI has streamlined real-time bank transfers, bringing previously untraceable transactions onto formal records.
Having established itself as a cornerstone of India’s daily commerce, UPI is now on the brink of a significant shift. The Indian government recently announced the introduction of a Merchant Discount Rate (MDR) of 0.4% on UPI transactions exceeding INR 2,000, effective from October 15, 2026. This charge is designed to transition UPI from a government-subsidized platform to a self-sustaining system, thereby promoting the expansion of digital payments.
Significantly, this charge applies exclusively to merchant transactions above the specified amount, while person-to-person UPI transfers remain free. Specific sectors such as railways, telecom, insurance, fuel, and agricultural inputs will incur a flat fee of INR 5 per transaction, whereas capital market transactions will be charged 0.02% per transaction, capped at INR 300. Importantly, the MDR is not a tax; rather, it is distributed among banks and payment service providers to cover infrastructure costs.
Brazil’s experience with its PIX payments platform, which has thrived despite similar merchant fees, serves as a precedent for this initiative. However, concerns have been raised about potential impacts, such as merchants passing the charge to consumers or encouraging cash transactions. Despite these concerns, a self-sustaining UPI could alleviate the government’s subsidy burden, freeing resources for other developmental projects. Additionally, merchants adjusting prices to cover the MDR could lead to a larger tax base as more income is recorded formally.
While the economic benefits of this new charge may take time to materialize, legal challenges have already emerged. A Public Interest Litigation (PIL) has been filed challenging the amendment to Section 10A of the Payment and Settlement Systems Act, 2007, which removed UPI’s no-charge protection, sparing only RuPay debit cards. The petitioner is seeking a declaration of unconstitutionality or a reconsideration of the decision to impose the MDR, advocating for a transparent consultative process.
Historically, Indian courts have shown deference to economic and fiscal legislation, acknowledging the legislature’s prerogative to experiment with economic policies. The introduction of a charge on UPI transactions can be viewed as an acceptable exercise of legislative discretion, rather than a rights violation.
In essence, a self-funding UPI system may prove more resilient than one reliant on government subsidies. Just as a well-maintained toll highway serves travelers better than a free, neglected one, UPI’s transition towards self-funding is a necessary evolution. Given the modest and targeted nature of the MDR, and the success of similar systems globally, UPI is likely to emerge stronger and more sustainable.
Nakul Dewan is a Senior Advocate and King’s Counsel.
