The Payments Council of India (PCI) has issued a significant clarification, reassuring millions of users and small businesses that Unified Payments Interface (UPI) transactions will continue to be free. This statement comes amidst a growing national debate surrounding the implementation of Merchant Discount Rate (MDR) on digital payments, particularly following recent amendments to India's payment laws.
According to the industry body, there are no current proposals to levy charges on consumers for using UPI. Furthermore, small merchants, including local kirana stores, will continue to accept UPI payments without incurring any MDR. The PCI's announcement aims to quell concerns that arose after the passage of the Payment and Settlement Systems (Amendment) Bill, 2026, which had sparked speculation about potential new fees for UPI users and merchants.
UPI Remains Free for Users and Small Businesses
Since its inception in 2016, UPI has been a cornerstone of India's digital economy, offering instant, free digital payments to consumers. The PCI reiterated that this fundamental principle remains unchanged, ensuring that every Indian can continue to make transactions without direct charges.
For small merchants, the commitment to free UPI acceptance is equally strong. The council emphasized that making digital payments accessible and affordable for even the smallest enterprises has been crucial to UPI's exponential growth and widespread adoption across the country.
Understanding Merchant Discount Rate (MDR)
Merchant Discount Rate (MDR) is essentially a fee paid by merchants to banks or payment service providers for processing digital transactions. While consumers do not directly bear this cost, the debate around its application to UPI has been contentious. Proponents argue that MDR is vital for funding the continuous development of payment infrastructure, bolstering cybersecurity measures, preventing fraud, and fostering innovation within the digital payment ecosystem. Critics, however, fear that imposing MDR could deter small businesses from embracing UPI or, indirectly, lead to increased costs for consumers through higher prices.
Why the Debate Over UPI's Future?
The discussion surrounding MDR for UPI has gained prominence as the platform has evolved into the world's largest real-time payment system, processing billions of transactions monthly. Maintaining and scaling such a vast network demands substantial and continuous investment in technological infrastructure, robust cybersecurity, advanced fraud prevention systems, regulatory compliance, and dedicated customer support. These significant costs are currently absorbed by various stakeholders, including banks, payment service providers, fintech companies, and the National Payments Corporation of India (NPCI).
The PCI clarified that the ongoing dialogue is centered on establishing a sustainable funding model for this critical infrastructure, all while steadfastly protecting the interests of consumers and small businesses.
The Payment and Settlement Systems Amendment Bill, 2026
The current debate was ignited by the recent passage of the Payment and Settlement Systems (Amendment) Bill, 2026, by the Lok Sabha. This amendment does not instantly introduce charges on UPI transactions. Instead, it strategically removes a prior legal prohibition that prevented banks and payment service providers from levying MDR on specific electronic payment modes, including UPI, as notified by the government.
The updated law now grants the Central Government the authority to specify which digital payment methods may, in the future, be subject to charges. This modification alters Section 10A of the Payment and Settlement Systems Act, 2007, which previously barred charges on payment modes specified under Section 269SU of the Income Tax Act, thereby keeping UPI and RuPay debit card transactions free of MDR until now.
Funding India's Digital Infrastructure
The amendment has re-ignited the fundamental question of how India's rapidly expanding digital payments ecosystem should be financed. Banks and payment companies have frequently highlighted that processing billions of UPI transactions without any MDR impacts the commercial viability and long-term sustainability of the system for them.
RBI Governor Sanjay Malhotra recently commented that while it is premature to discuss the immediate levy of MDR, it is imperative that digital payment infrastructure ultimately be funded. This funding, he noted, would likely stem either from a "user pays" model or through continued public funding via taxpayers.
What This Means for Consumers and Merchants
The PCI firmly stated that any applicable merchant service charges are commercial agreements solely between merchants and their payment service providers. These arrangements do not, in any way, imply that consumers will be required to pay for making UPI payments. Such merchant service charges, the council noted, are a common feature in digital payment ecosystems globally, even as consumers worldwide continue to enjoy free and convenient digital payment services.
While industry experts anticipate that if MDR is eventually introduced, it would likely first apply to merchant payments exceeding a certain transaction threshold, person-to-person (P2P) UPI transfers are widely expected to remain free. Crucially, the government has yet to issue any official notification specifying if, when, or on which transactions such potential charges might apply, maintaining the current free status for consumers and small merchants.