The government may discontinue subsidies supporting low-value UPI transactions as banks, payment companies and UPI platforms begin earning revenue through the newly introduced Merchant Discount Rate, or MDR.
The move could mark a major shift in the economics of India’s UPI ecosystem, which has operated largely without merchant fees for several years. The government has been compensating banks and payment companies for the cost of maintaining the system, but the introduction of MDR on selected transactions could reduce the need for taxpayer-funded support.
Why The Government Is Considering Ending UPI Subsidies
The government introduced incentives for UPI and RuPay transactions after MDR was made zero to encourage digital payments.
However, UPI has now reached enormous transaction volumes. The government has indicated that the payment ecosystem needs a more sustainable revenue model as costs related to infrastructure, cybersecurity, fraud prevention and technology continue to rise.
According to reports, no fresh subsidy has been paid for UPI transactions since April 2025, even though the Centre has budgeted Rs 2,000 crore for UPI and RuPay incentives in FY27.
New MDR Will Generate Revenue
From October 15, 2026, a 0.4% MDR will apply to specified person-to-merchant UPI transactions above Rs 2,000.
The charge will not apply universally. Transactions involving individuals will remain free, while payments to merchants up to Rs 2,000 will also remain free.
The government says around 96% of all merchant UPI transactions will therefore remain unaffected.
For transactions of Rs 75,000 and above, the MDR will be capped at Rs 300 per transaction.
Most Everyday UPI Payments Will Remain Free
For consumers, the new system does not mean that UPI will suddenly become a paid service.
Person-to-person payments will continue to be free regardless of the amount transferred. Small merchant transactions will also remain outside the MDR framework.
Small merchants receiving up to Rs 1 lakh per month through eligible UPI QR transactions will continue to receive zero-MDR treatment.
This means everyday payments such as small grocery purchases, local transport payments and other low-value transactions are expected to remain free.
Who Will Receive The MDR Revenue?
The MDR is not a government tax.
The revenue will be distributed among participants in the UPI ecosystem, including issuing banks, payment service providers, acquiring banks, payment aggregators and UPI application providers.
This is intended to create a commercial revenue stream that can help companies recover the cost of operating and expanding the payment infrastructure.
The government has also announced that an amount equivalent to 5% of total MDR collections will go towards a fund aimed at promoting UPI adoption among small merchants.
Why The Change Matters For UPI
UPI has grown dramatically since its launch in 2016. It now processes billions of transactions every month and has become India’s dominant digital payment system.
However, running such a massive real-time payment network requires continuous investment.
Banks and fintech companies have argued that operating the UPI ecosystem at enormous scale without a sustainable revenue model is difficult.
The new MDR framework is therefore designed to shift part of the financial burden from government incentives towards revenue generated within the payment ecosystem.
Will UPI Become More Expensive?
For most consumers, there should be no direct charge for using UPI.
The bigger question is whether merchants will absorb the MDR or attempt to recover the cost through pricing. The government has stated that MDR is a charge within the merchant payment ecosystem and should not be passed on to consumers as a separate UPI fee.
The government could ultimately reduce or eliminate subsidies as MDR revenue becomes established. However, the timing and extent of any withdrawal will depend on how the new revenue model performs.
For UPI, the change represents a move from a largely subsidy-supported model towards a more commercially sustainable ecosystem while keeping most everyday digital payments free.
Summary
The government may phase out subsidies supporting UPI transactions as banks and payment companies begin earning revenue through the new MDR framework. From October 15, a 0.4% MDR will apply to specified merchant transactions above Rs 2,000, while person-to-person payments and most everyday merchant transactions remain free. The shift is aimed at making India’s massive UPI ecosystem financially sustainable.
