India's government has proposed a law that could end a long-standing rule keeping UPI payments free for shops. Since January 2020, merchants have paid no fees when customers use UPI, the country's most popular instant payment system. The new bill does not set any charges or say which transactions would be affected, but it clears the way for fees to be introduced later through separate rules. (Mint, TechCrunch)

The scale of UPI is enormous. In July 2026 alone, it processed a record 23.66 billion transactions worth ₹29.88 trillion (about $313.4 billion), according to the National Payments Corporation of India (NPCI), the organisation that runs the network. UPI has become the backbone of India's digital economy, and running something this large without any revenue from merchants has been a source of tension for years among the finance ministry, the Reserve Bank of India, and payment companies. (TechCrunch)

A merchant discount rate, or MDR, is a small fee that a shop pays when a customer pays electronically. It is similar to the fee a shop pays when a customer swipes a credit card. India removed MDR on UPI in January 2020 to encourage more people and businesses to use it. That policy worked in driving adoption, but it also meant that the banks and payment apps handling the transactions paid all the running costs with no revenue from shops in return. Walmart-owned PhonePe and Alphabet's Google Pay together handle nearly 80% of UPI transaction volumes, according to NPCI data, which means the cost burden falls heavily on just two companies. (TechCrunch)

The proposal follows years of debate among India's finance ministry, its central bank, and payment companies over how to fund the fast-growing network. Pine Labs chief executive Amrish Rau welcomed the move, saying the industry needs to recover part of its investments from merchants while keeping consumer and person-to-person payments free to put UPI on a more sustainable footing. (TechCrunch)

Investment firm Jefferies estimated that charging fees on higher-value UPI transactions could generate an additional ₹50 billion to ₹100 billion (about $525 million to $1.05 billion) in annual revenue by fiscal 2028, assuming a fee of 0.15% to 0.30% of the transaction value. The Economic Times reported that Indian officials were considering limiting any merchant charges to larger shops rather than applying them across all UPI transactions. (TechCrunch)

The reason for targeting larger transactions is clear in the data. Research firm Bernstein reported that UPI transactions above ₹2,000 (about $21) account for only about 4% of the number of payments but nearly 70% of the total money flowing through the network. A fee structure aimed at larger transactions would capture most of the monetary value while leaving the vast majority of everyday payments untouched. (TechCrunch)

The broader context here extends beyond India. UPI is already live in Singapore, the United Arab Emirates, and France, among other countries, and NPCI has been expanding the network's international reach. A sustainable funding model could influence how other countries thinking about building similar real-time payment systems approach the question of cost recovery and merchant participation. (TechCrunch)

India's central bank already has a precedent for tiered fees. Under rules simplified in 2017, the RBI caps the fee for small merchants (those with turnover up to ₹20 lakh in the previous financial year) at no more than 0.40% per transaction, with a maximum of ₹200. Larger merchants pay higher rates depending on their business category. Whether UPI merchant fees would follow a similar structure will be decided in later rule-making. (RBI)

NPCI operates as an umbrella organisation running UPI payments, Bharat Bill Pay, RuPay cards, FASTag, and the National Automated Clearing House (NACH), which handles high-volume electronic transfers between banks for subsidies, salaries, and collections. UPI is one part of a broader payments infrastructure that the Indian government has built and subsidised. (NPCI)

The legislation's deliberate vagueness is worth flagging. By creating the legal authority to impose merchant fees without specifying rates, thresholds, or which types of businesses would be affected, the government keeps maximum flexibility to adjust the system through later announcements, likely after consulting with stakeholders. That approach allows for course correction but also prolongs uncertainty for payment companies and merchants trying to plan for the financial impact.

For PhonePe and Google Pay, the two dominant UPI apps, the prospect of merchant fee revenue could meaningfully improve their finances. Both have operated at massive scale without direct revenue from UPI transactions, relying instead on selling other financial products and services. A fee of 0.15% to 0.30% on higher-value transactions would not transform their businesses overnight, but it would give them a revenue stream tied directly to the payment activity they handle.

The risk is that even a narrowly targeted fee could make some merchants less enthusiastic about UPI, particularly mid-size businesses that fall just above whatever threshold the government sets. India's zero-fee policy was designed to speed up adoption, and any change from that approach carries the possibility of friction. Whether the targeting mechanisms being considered, such as limiting charges to larger merchants, can avoid that problem is a question the rule-making process will need to answer.

What this ultimately enables is a path toward self-sustaining infrastructure for one of the world's largest real-time payment networks. The zero-fee era served its purpose in driving adoption to extraordinary scale. The next phase, if the legislation proceeds, will test whether India can shift UPI from a subsidised utility to a funded platform without losing the momentum that made it a global reference point for digital payments.