Why charging UPI use is a bad idea

Over the years, the Unified Payments Interface (UPI) has emerged as one of the most powerful innovations in India’s financial system. It has brought about a massive behavioural change in the way customers make payments. Since UPI was launched in 2016, its adoption has grown at an extraordinary pace. The number of users onboarded on the platform rose to 55.49 crore by June 2026, according to official data. Transaction volumes have expanded even more dramatically, from around 2 crore transactions in FY2016-17 to 24,161.69 crore transactions in FY2025-26.

UPI has put digital payments within reach of even small merchants, with the humble QR code becoming ubiquitous across the country. That has helped reduce dependence on cash and brought a large number of transactions into the formal financial system. It has also improved transparency and reduced the scope for disputes and unrecorded cash transactions.

Cut to the present, UPI is at a critical juncture. The government’s decision to introduce a 0.4 per cent Merchant Discount Rate (MDR) on specified person-to-merchant transactions above Rs2,000 from October 15 has raised concerns among merchants as well as consumers. Although the government has said that 96 per cent of merchant transactions will remain unaffected, merchant bodies have warned that the charge could put pressure on margins and encourage some retailers either to pass on the cost to customers or revert to cash.

The Retailers Association of India has said small merchants may think twice about accepting UPI, while retail groups representing mobile and consumer-goods businesses have raised concerns about the possibility of the cost being passed on to customers. The concern is particularly relevant for higher-value purchases, where the 0.4 per cent MDR will apply.

Besides, there is no pressing financial need to charge for UPI usage. NPCI, the operator of the platform, reported revenue from operations of around Rs3,270 crore and net profit after tax of Rs1,527 crore in FY2024-25, with net profit rising 24 per cent from the previous year. In this backdrop, the question arises: what is the need to make a winning product chargeable at this point?

Not just that, the effective cost to merchants could be marginally higher because GST is also applicable on the MDR charged by payment service providers. A 0.4 per cent MDR would mean an additional 18 per cent GST on the MDR, taking the total payment-related cost to about 0.472 per cent of the transaction value, where GST is applicable.

There is also a broader benefit to reducing dependence on cash. The RBI spent Rs6,383 crore on printing banknotes in FY2024-25. The cost of cash to the financial system, however, goes beyond printing, including transportation, storage and security. The gains from keeping UPI free, therefore, could be much greater than the revenue that a charge on merchants would generate.

The point is that if the government is serious about encouraging UPI usage, it should keep the system free for merchants and subsidise the cost through a separate government allocation. UPI has become a critical piece of India’s payments infrastructure. Introducing a charge, even if it applies only to a section of transactions, risks creating an incentive to fall back on cash. The government must weigh that possibility against the relatively small revenue it hopes to generate.