India's UPI fee debate heats up as government clears way for potential merchant charges, fintech ecosystem on alert

India's digital payments sector is bracing for a potential shift in its economic model after the Lok Sabha on Thursday passed the Taxation and Other Laws (Amendment) Bill, 2026, empowering the central government to notify charges on UPI and other electronic payment modes. Finance Minister Nirmala Sitharaman moved swiftly to contain the political fallout, asserting that any Merchant Discount Rate (MDR) imposed in the future would be borne by merchants, not end consumers.

The legislation amends Section 10A of the Payment and Settlement Systems Act, 2007. It does not itself introduce any fee but creates a legal framework under which the government may revise the existing zero-MDR policy through a future notification. The UPI and Services Steering Committee, headed by the National Payments Corporation of India (NPCI), will examine the matter only after the Bill becomes law, Sitharaman said.

"Merchant Discount Rate (MDR) applies only on the merchants and not on the end users/customers. It will support the Banks & Fintech to invest more on infrastructure, innovation & security," Sitharaman posted on X, responding to a claim by Congress leader Jairam Ramesh that ordinary people would end up paying for UPI. "All users of UPI will reap the benefits of this investment."

The Payments Council of India (PCI) on Friday sought to allay concerns, stating that UPI will remain free for consumers and that small merchants, including kirana stores, will not be charged for accepting digital payments. "Any merchant service charges, where applicable, would be commercial arrangements between merchants and payment providers and would not mean consumers have to pay for using UPI," PCI said in a statement. The industry body noted that banks, fintech companies, the NPCI and the Reserve Bank of India have collectively invested for nearly a decade in technology, cybersecurity and fraud prevention to build and maintain the infrastructure.

The clarification comes amid a broader policy debate over the future economics of India's digital payments ecosystem, which has been built on a zero-MDR regime since UPI's launch in 2016. According to an opinion piece in The Economic Times, UPI processed over 24,162 crore transactions worth more than ₹314 lakh crore in FY26, with monthly transaction volumes crossing 23 billion. More than 55 crore Indians now use UPI, making it the world's largest real-time retail payment system. The same piece noted that of 58.77 crore Jan Dhan accounts, around 15 crore are inactive.

Proponents of the current zero-MDR framework argue that eliminating transaction fees was the single-biggest barrier to adoption, allowing millions of small businesses — from kiranas and tea stalls to auto drivers — to join the formal digital economy. Reintroducing MDR could jeopardise those gains, particularly in price-sensitive tier-3 and -4 cities and rural India, where even a modest transaction fee might incentivise a return to cash, the opinion piece argued. It said UPI should be viewed as public digital infrastructure, with benefits extending beyond payment service providers to include fiscal transparency for governments, richer transaction data for lenders, and credit access for micro-enterprises.

Jairam Ramesh, in his post on X, alleged the proposed amendment removes the statutory safeguard that has kept UPI transactions free. "The burden of this will ultimately fall on ordinary people, who may now have to pay even for using UPI," he wrote. He disputed the government's argument that MDR is necessary for sustainability, pointing to the RBI's surplus transfer of ₹2.86 lakh crore to the government in 2025-26. "Just a small portion of this amount would be enough to support this vital digital public infrastructure," he said. Ramesh also questioned whether the amendment was prompted by criticism in the U.S. Trade Representative's 2026 report, which he claimed questioned the fee-free nature of UPI and RuPay.

Sitharaman rejected the assertion and linked the lack of debate on the Bill to opposition disruptions in Parliament since the Monsoon session began on July 20. "The Bill could have been discussed on the floor of the House if your party engages constructively in Parliament when the Bill was/is tabled," she wrote.

Meanwhile, think tank GTRI warned that India must not rewrite its UPI policies under U.S. pressure, according to a report by News18. GTRI said that zero MDR contributed significantly to the growth of digital payments by allowing consumers, small shops and roadside vendors to transact without charges.

The Bill now awaits passage in the Rajya Sabha. Once enacted, the NPCI-led steering committee will begin deliberations on any potential MDR structure. The outcome will have direct implications for fintech players, banks, and the wider digital payments market, which has relied on the no-fee model as a cornerstone of adoption.