UPI’s Next Phase

India’s mature UPI ecosystem may require calibrated MDR and mixed funding to sustain infrastructure, reliability and innovation, moving beyond zero-MDR while limiting distortions in digital payment behaviour.

Key Regulatory & Policy Changes

Statutory Amendment: The Taxation and Other Laws (Amendment) Act, 2026 amended Section 10A of the Payment and Settlement Systems Act, 2007, granting the Central Government discretionary statutory power to determine and specify which electronic payment modes remain exempt from merchant charges.

 Tiered MDR Structure:

• Threshold: Effective October 15, a 0.4% MDR applies to Person-to-Merchant (P2M) transactions exceeding ₹2,000.
• Upper Cap: MDR is capped at ₹300 for high-ticket transactions above ₹75,000.

Exemptions & Concessions:

• Low-value P2M transactions up to ₹2,000 remain zero-rated.
• Person-to-Person (P2P) transfers remain completely free.
• Small merchants receiving up to ₹1 lakh per month via QR codes are entirely exempt.
• Select essential sectors attract concessionary or flat fees.

Network Scale: By August 2026, UPI processed ~24.5 billion monthly transactions worth nearly ₹30 trillion, demonstrating widespread domestic penetration.

• The Cost-Revenue Mismatch: Operating the network—including transaction switching, settlement clearing, server hardware, cyber-fraud monitoring, and grievance redressal—costs the banking and fintech ecosystem an estimated ₹20,700 crore annually (as highlighted by the Parliamentary Standing Committee).
• Inadequate Subsidies: Central subsidies (standing at ₹1,500 crore for FY 2024–25 for small-merchant low-value payments) covered only a sliver of total operational expenses. Expecting payment service providers (PSPs) and acquiring banks to absorb these costs indefinitely risks chronic underinvestment in server redundancy, latency reduction, and cybersecurity.

Market Dynamics & Behavioral Consequences

Volume vs. Value Distribution

Transactions above ₹2,000 constitute only ~4% of UPI volume, but represent approximately two-thirds (66%) of total transaction value. By targeting solely this bracket, the policy protects 96% of daily consumer footfall while opening a sustainable revenue stream over high-value capital flows.

Merchant Margins and Cost Pass-Through

Merchants operating on thin retail margins (e.g., consumer electronics, wholesale trade, jewelry) cannot easily absorb a 0.4% cut. Depending on local market competition and price elasticity, merchants have three options:

• Absorb the fee as an operating expense.
• Embed the fee into overall product markups.
• Pass it directly onto the consumer as an explicit payment convenience surcharge.

Potential Distortions & Arbitrage Risks

• Incentive to Split Bills: Consumers and merchants may split large transactions into sequential tranches below ₹2,000 to circumvent the MDR, inadvertently creating artificial transaction volume that strains server infrastructure.
• Channel Switching to NEFT or Cheques: Because the Reserve Bank of India mandates that digital NEFT transfers be free for savings account holders, high-ticket commerce may migrate to NEFT, or even to same-day clearing cheques.
• Credit Card Cost Comparison: Even with a 0.4% fee on UPI, credit cards remain far more expensive for merchants. A typical credit card MDR of ~1.6%, discounted over a standard 30-day interest-free period at a 6% cost of capital, yields a net present cost of ~1.1%—nearly triple the 0.4% UPI rate.
• Cash Reversion Risks: For informal large-ticket transactions, merchants may push consumers back to paper currency, eroding hard-won digital paper trails used for credit underwriting, tax assessment, and anti-money laundering tracking.

Structural Comparison: Old Zero-MDR vs. 2026 Framework