Binish Thomas (Special Correspondent)
UPI’s proposed Merchant Discount Rate applies to certain merchant payments above ₹2,000, not directly to consumers.
But if businesses absorb the cost by raising prices, cutting discounts or adding fees, could shoppers ultimately pay for India’s new digital-payment charge?.
When India announced the demonetisation of ₹2000 and ₹1,000 notes on 8 November 2016, the government said the move targeted black money, counterfeit currency and the financing of unlawful activities while encouraging formal and digital payments.
Most of the withdrawn currency, however, returned to the banking system.
The Reserve Bank of India reported that approximately 98.96% about ₹15.28 lakh crore of ₹15.44 lakh crore was returned to the RBI.
Demonetisation nevertheless coincided with, and may have accelerated, the shift towards formal banking and digital payments.
The extent to which it directly caused UPI’s later expansion is difficult to isolate and should not be presented as conclusively established.
The rise of UPI:
Launched in 2016,UPI has become central to India’s payment system.
The cited government figures state that annual transaction volume rose from 1.78 crore in FY2016–17 to more than 24,162 crore in FY2025–26, while transaction value increased from approximately ₹0.07 lakh crore to ₹314 lakh crore.
The NPCI data showing that UPI processed approximately 24.51 billion transactions worth ₹29.82 trillion in August 2026, averaging about 791 million transactions a day.
Rs.29.82 trillion divided by 24.51 billion transactions is approximately ₹1,216 per transaction, and 24.51 billion transactions over 31 days is approximately 791 million per day.
What changes from 15 October 2026?:
The document states that a new framework will introduce MDR on specified person-to-merchant UPI payments above ₹2,000 from 15 October 2026:
Transaction New MDR
Person-to-person (P2P) – Zero.
Merchant payment up to ₹2,000 Zero.
Other merchant payments above ₹2,000 – 0.4%.
Transactions of ₹75,000 or more Maximum. – ₹300.
Certain essential sectors above ₹2,000 ₹5 flat MDR.
Mutual funds, securities and stockbroking- 0.02%, capped at ₹300.
Govt Answer for these questions ! :
• Whether the threshold is exactly ₹2,000.
• Whether the framework begins on 15 October 2026.
• Whether the 0.4% rate applies to all covered transactions above ₹2,000 or only specified categories.
• Whether the ₹300 cap applies to all covered transactions of ₹75,000 or more.
• The precise definition of “eligible small merchants”;
• whether the ₹5 rate applies to all listed essential sectors.
• Whether the 0.02% rate and ₹300 cap apply exactly as described to mutual funds, securities and stockbroking transactions.
• Whether the rates are inclusive or exclusive of any applicable taxes or other charges.
Govt says that the ₹5 sectors include railways, telecommunications, insurance, fuel and agricultural inputs.
This sector list and the applicable transaction categories require verification against the official policy text.
How common people struggle with the new UPI Transaction Fee:
1 Core Struggle: Fear of Cost Pass-Through,The dominant worry, voiced by economists, politicians, and shoppers alike, is that merchants will simply add the MDR cost into prices exactly as many currently add a 2% surcharge for credit card payments.
Former finance minister P. Chidambaram has publicly drawn this parallel, saying merchants already pass on card fees and the same pattern is likely with UPI.
An IT professional in Hyderabad echoed this fear directly, describing the new fee as likely to force many people back to cash transactions, since many small businesses in remote places already avoid UPI or card payments, and worrying this reluctance could now spread into suburban and urban areas.
2.Disproportionate Reach Despite Small Transaction Count:
Although transactions above ₹2,000 represent a small share of total UPI transaction volume, they carry outsized value.
Payments above ₹2,000 make up only about 4% of person-to-merchant transaction volume, but nearly two-thirds of their total value.
This means the fee, while framed as narrow, touches a large portion of real household spending big grocery bills, appliance purchases, big-ticket services rather than only rare luxury transactions.
3.Inconsistent Rules Create Confusion at the Counter:
Because different categories face different rules 0.4%/₹300-cap for general merchants, a flat ₹5 for fuel/telecom/insurance/
Analysts note the impact will vary significantly by sector, keeping cost effects “relatively contained” in some areas but not others.
4.Small Merchants May Simply Discourage UPI for Bigger Purchases:
Several merchants interviewed said they anticipate customers reverting to cash rather than absorbing the fee themselves.
This creates a secondary struggle for consumers: reduced acceptance of UPI for higher-value purchases, forcing people to carry cash again for exactly the kind of spending UPI was meant to replace echoing the “no-UPI-for-big-purchases”
5.Anxiety About a “Slippery Slope”:
Some younger users worry this fee, once normalized, could expand either to smaller merchants or eventually to peer-to-peer transfers.
A student quoted in coverage said the fear is that younger people starting small businesses might hesitate if they think a share of their profits will always go to fees, discouraging entrepreneurship built around digital payments.
6.Public Doubt Over Whether the Fee Is Even Necessary:
Independent think tank GTRI has questioned the government’s underlying rationale. Its founder noted that keeping UPI free costs the government only an estimated ₹2,000–2,500 crore annually modest next to major subsidies like food (₹2.03 lakh crore) or fertilizer (₹1.68 lakh crore) and pointed out NPCI itself posted a ₹1,552 crore surplus in FY2025.
This has fed a public perception that the fee may not be strictly needed for “sustainability,” deepening skepticism among common people asked to indirectly bear the cost.
7.Political Amplification of Consumer Anxiety:
Multiple opposition figures Congress’s Rahul Gandhi and Jairam Ramesh, Telangana CM Revanth Reddy, BJD’s Naveen Patnaik, and CPI(ML)’s Dipankar Bhattacharya have publicly framed the fee as an indirect tax on ordinary citizens.
Congress specifically argued that even if MDR-eligible transactions are a small share of volume, they are added straight to prices, ultimately coming out of the customer’s pocket.
This sustained political messaging, regardless of its accuracy, keeps uncertainty and worry alive among the public, who may now approach even routine UPI purchases with more hesitation.
8.Government’s Counter-Reassurance:
To be fair to the other side: the government has directed banks and payment providers not to levy any charge on transactions up to ₹2,000 or on RuPay debit card payments, and officials say they are working with payment platforms specifically to prevent pass-through to consumers.
The Finance Ministry has called claims of hidden motives “patently false and misleading.” Whether this reassurance holds in practice given India’s track record with card surcharges remains the open question driving public anxiety.
Who pays the MDR?:
MDR is formally charged within the merchant-payment ecosystem, not directly to the customer. For a covered transaction, the stated rate is 0.4%:
• ₹10 on ₹2,500.
• ₹40 on ₹10,000.
• ₹200 on ₹50,000.
The economic burden could nevertheless spread beyond merchants. Businesses may absorb the cost, accept lower margins, reduce discounts, raise prices generally or encourage customers to use other payment methods. These are economic possibilities, not established outcomes.
Why introduce MDR now?:
The UPI was kept free for years to encourage adoption and that maintaining the system requires spending on infrastructure, cybersecurity, fraud monitoring, processing, customer support and compliance.
These are reasonable descriptions of payment-system costs, but the claim that UPI was kept free specifically for adoption should be supported by an official policy history or clearly attributed to the government.
The political controversy:
The opposition leaders, including Rahul Gandhi, alleged that the decision reflected US pressure and benefited American companies. It also states that the government rejected the claim and said India’s UPI policy was made independently.
The available reporting may establish that an allegation was made and denied, but it does not by itself prove that MDR was introduced because an American company demanded it.
The document correctly treats that causal claim as unproven, provided the cited reporting does not contain additional evidence that would alter the assessment
Could MDR affect digital adoption?.
The immediate effect may be limited if most P2M transactions remain outside the charge and P2P transfers remain free. The document also says that the 0.4% rate is lower than many traditional card-processing fees.
The comparison with card-processing fees requires a source and careful qualification. Card MDR varies by card type, merchant category, acquirer, network, transaction size, regulatory rules and commercial agreement. The statement should not be retained as a general fact without a comparative source.
Over time, merchants may reconsider how they accept larger payments or recover costs through prices and reduced discounts.
If customers begin seeing payment-related charges, UPI’s reputation as a free and frictionless system could weaken. These are scenarios, not verified outcomes.
What should be monitored?:
The government and NPCI should publish data on:
1.MDR collected and the number of affected transactions.
2.Average MDR paid by merchants.
3.Distribution of revenue among banks and payment applications.
4.Effects on small businesses and consumer prices.
5.Changes in cash usage, UPI volumes and application market shares.
Consumers are not officially charged the fee under the framework as described, but merchants may respond through prices, margins or discounts.
The central question is therefore not simply who pays MDR formally, but who ultimately bears its economic cost.
