We have all spent years training ourselves to ditch cash.
Scan. Pay. Walk away.
It was that easy, right?
But from October 15, some UPI payments will no longer be completely free.
The government says the fee is not for you or me, but it’s for the merchant.
And it won’t be on every transaction. The new Merchant Discount Rate, or MDR, will apply to merchant payments above ₹2,000.
We have always been told UPI is free
So if it was "free," who was actually paying for the massive machinery behind it?
And now, that machinery is being given a new way to recover its costs- Who gets to make money from a payment system that an entire country has spent years building?
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Many people are angry about the government introducing a fee for some UPI transactions.
But first, we need to understand something important.
UPI was free to users. But UPI was never free to operate.
NPCI, or the National Payments Corporation of India, operates UPI. This corporation connects different banks and payment service providers involved in the transaction.
So when you make a payment
Your bank has to check whether you have the money and then authenticate the transaction.
Then there is a bank which receives the money
The system was spending money to detect frauds, deal with failed transactions, reversals, disputes and customer support.
Payment apps like Phone pe, Google pay etc spent a lot of money building platforms and the tech, acquiring users and merchants
One estimate puts the annual cost of operating the UPI ecosystem at around ₹20,700 crore.
With no fee charged, the industry had to recover those costs elsewhere.
Banks absorbed some of them. Payment companies invested heavily in the network. And the government provided subsidies and incentives.
Between 2021 and 2025, the government paid ₹8,730 crore in incentives to promote digital payments.
So yes, UPI was free to users. The infrastructure behind it wasn't free.
Now how to recover some of this cost and ensure the system goes on?
The government says the 0.4% fee, that is the MDR, is intended to do exactly that
MDR or merchant discount rate is the transactional fee that a merchant has to pay.
If I buy a product for Rs 2,001 and pay through UPI, the merchant has to pay a fee of Rs 8
For a ₹75,000 payment, it would be a ₹300 fee, which is also the maximum MDR per transaction.
There are separate flat rates for some sectors such as fuel, telecom, insurance and railways.
Now through all this outrage on UPI fee, the government has been repeating one thing: individual users won't pay a single rupee extra.
Instead, MDR will kick in only on specific business payments over ₹2,000.
The government also claims 96% of all UPI transactions are anyway less than Rs 2000
Which means most small vendors will not be affected.
Also small vendors who have a monthly turnover of less than Rs 1 lakh in UPI receipts are exempt.
Sounds good, right? Well, here's the catch.
The 96% that the government talks about refers to the number of payments.
But the rest of the 4% of merchant transactions account for roughly 67% of the value of P2M or person-to-merchant payments.
So while 96% of transactions remain outside the MDR regime, a very large share of the money moving through merchant UPI payments will attract the fee.
And then there is GST.
The MDR itself attracts 18% GST.
GST-registered businesses can generally claim that as input tax credit, while the position is more complicated for businesses that cannot claim that credit.
And there is another problem
Lack of trust
A few years ago the government said they are not looking to introduce UPI fee or MDR
Now they have introduced it
What is the guarantee that within a few years or months, some of these exemptions won’t be removed?
Which is why merchants are pushing back.
In Ghaziabad, traders have put up notices saying they will stop accepting UPI from October 15
Retail associations have raised concerns about their thin margins
Petrol dealers in Mumbai have threatened to reconsider UPI for higher-value payments.
The merchant fee for UPI has rankled people, but merchants across India cannot just abandon UPI.
Because UPI is a convenience, it is too valuable to give up.
UPI was built as public digital infrastructure, with substantial government support.
The last estimate is that 554 million Indians use UPI
So there are two questions here
Why did the government build UPI, keep it free and make millions come on board?
And why can’t the government keep paying for the infrastructure rather than creating a new transaction-linked revenue stream?
There is another reason why the “cost of UPI” argument isn't quite as simple as it sounds.
UPI doesn't just move money.
It also creates a digital record of economic activity.
Every time you pay with UPI, you leave a trail.
And sometimes it helps.
One example is that banks and lenders often give loans based on these payment records —even if you've never had a formal credit score or property to pledge.
And now to the substantial question
Where will the money collected as fees go?
MDR isn't a government tax. So the money isn’t going to the government.
It's a fee which will be split between the players who keep the system running—the banks, the payment apps, and the tech networks.
Let’s fast forward to October 15 and imagine that all UPI transactions above Rs 2000 to a merchant will carry a 0.4% fee
This new fee is expected to unlock tens of crores every year.
So who benefits?
The banks and the digital payment companies mainly.
PhonePe and Google Pay together account for more than 80% of UPI transaction volumes.
Phonepe CEO Sameer Nigam and Paytm Ceo Vijay shekhar have backed the new fee system
They say that for years companies had to depend on government subsidies and loans for their business and MDR will change that equation for them.
So let’s get this correctly.
Taxpayer money was used to subsidise the UPI network and build it.
Now, private companies will start making money from the digital network because millions of people have been onboarded.
This is why people are asking- Was it the government’s job to build this digital network and now enable private companies to reap the dividend?
And finally
The government insists that banks have been told to ensure that merchants do not pass the charge on to customers. And that UPI apps cannot impose hidden charges.
But despite this, there is no guarantee that a merchant will not increase the prices slightly to cover for the fee
They don’t necessarily have to add a line to your bill saying “UPI surcharge”.
India isn't a cashless economy. It's a cash-and-digital economy, and people move between the two.
In 2025-26, UPI processed 241.6 billion transactions worth ₹314.2 lakh crore.
Yet currency in circulation was ₹41.7 lakh crore, about 12% of GDP, similar to pre-demonetisation levels.
There's no evidence yet that MDR will push people back to cash. But it does raise a bigger question: who should pay for UPI, who should recover that cost, and who should profit from the infrastructure India has spent years building?
Produced by Megha Mukundan, script by Pooja Prasanna, edit by Jaseem Ali, Nikhil Sekhar E T, camera by Ajay R
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