- UPI transactions are currently free, but the government is considering introducing charges on payments above ₹2,000 to businesses.
- The proposed MDR would be between 0.3% and 0.5% for transactions exceeding ₹2,000 for merchants with an annual turnover above ₹1.5 crore, while P2P transfers will remain free.
- Finance Minister Nirmala Sitharaman introduced the Taxation and Other Laws (Amendment) Bill in Parliament, which allows the government to notify MDR without automatically imposing charges.
- RBI Governor Sanjay Malhotra stated that it is premature to discuss UPI charges, emphasizing that 'costs have to be paid by someone' as the government continues to amend the legislation.
- The amendment to the Payment and Settlement Systems Act, 2007, empowers the government to notify electronic payment modes on which banks or payment system providers cannot levy charges.
- The legal authority to levy an MDR is established by the Bill, but it does not specify the fee amount or the transaction categories it would apply to.
- The government's proposal includes two options: charging an MDR on payments above a certain threshold or levying fees based on a merchant's annual turnover.
- The second option would apply charges only to large merchants while keeping UPI payments free for consumers and small businesses.
RBI Governor Sanjay Malhotra emphasized that the costs of maintaining the UPI system must be covered by someone, as the government considers a merchant discount rate (MDR) on transactions over ₹2,000. The proposed MDR of 0.3-0.5% would apply to businesses with annual turnovers exceeding ₹1.5 crore.24
The Taxation and Other Laws (Amendment) Bill introduced by Finance Minister Nirmala Sitharaman aims to empower the government to notify electronic payment modes subject to charges. Currently, UPI transactions are free, but this may change as the government seeks to address the costs associated with the rapidly growing payment network.135
Malhotra stated, "The costs have to be paid by someone. We all want that this public infrastructure should continue to strengthen." He noted that while person-to-person UPI transfers will remain free, larger merchants may incur fees for transactions above the threshold.
The government is considering two options: charging an MDR on larger transactions or implementing fees based on a merchant's annual turnover. The proposal aims to ensure that small businesses and consumers remain unaffected while addressing the financial sustainability of the UPI system.
As UPI transactions continue to grow, the need for a sustainable funding model becomes increasingly critical. Malhotra remarked, "Running a payments network this size isn't free. Somewhere, the money has to come from. Whether that's the government, the merchant, or eventually the customer is the real debate."
“The proposal under consideration would apply an MDR of 0.3–0.5% to UPI payments above ₹2,000 only for merchants with annual turnover exceeding ₹1.5 crore, leaving P2P transfers and small shopkeepers free. Malhotra added that the government is still carrying out the amendment and costs are already being passed on, urging a 'wait and watch' approach.”
