Specified Person-to-Merchant (“P2M”) UPI transactions above ₹2,000 will attract an MDR of 0.4%, subject to a cap of ₹300 per transaction. Certain sectors, including fuel, telecom, insurance and utilities, will instead attract a flat MDR of ₹5 for transactions above ₹2,000. Small merchants receiving up to ₹1 lakh per month through UPI under the P2PM framework will remain exempt.

The Government’s position is straightforward. UPI is no longer a small payment network. It processed 24,509 million transactions worth approximately ₹29.82 lakh crore in August 2026 alone. Maintaining that infrastructure requires spending on cybersecurity, fraud prevention, servers, resilience and continuous technological upgrades. Industry estimates cited by the Government put the annual cost of maintaining UPI at around ₹20,000 crore.

That premise is difficult to dispute, and it is not the objective of the authors to dispute that premise either. What can and must be debated is whether the present MDR structure is the right answer.

Rationale behind the thresholds

The NPCI’s FAQs explain the framework in considerable detail. What they do not explain with the same clarity is the rationale behind these particular numbers. Why ₹2,000? Why 0.4%? Why ₹5 for selected sectors? Why ₹1 lakh a month?

The justification for ₹2,000 is that more than 95% of P2M transaction volume falls below that threshold. But that establishes what the threshold captures, not why ₹2,000 is the economically appropriate dividing line.

In fact, the threshold creates a sharp discontinuity. A ₹2,000 transaction attracts no MDR; a ₹2,001 transaction attracts 0.4% of the transaction value, meaning the MDR is approximately ₹8. The distinction is therefore not between a “small” and “large” transaction in any meaningful commercial sense. It is an administrative line.

The ₹1 lakh monthly threshold raises a similar question. The Government describes merchants receiving up to ₹1 lakh through UPI QR codes as “small merchants”. Yet UPI has become so deeply embedded in ordinary commerce that ₹1 lakh in monthly digital receipts need not correspond to the economic size or profitability of a business. A neighbourhood restaurant, grocery store or service provider can cross ₹1 lakh in UPI receipts without being a large commercial enterprise.

The same question applies to the flat ₹5 charge. The Government clarified that the flat rate is intended to protect essential and thin-margin sectors from the escalation that a percentage fee would create. While that is understandable, the FAQs do not disclose the methodology by which ₹5 was arrived at. The same is true of the 0.4% baseline.

This matters because the Government itself stated that the operational parameters and fee distribution model were determined after deliberations by the NPCI-led UPI and Services Steering Committee. Yet the underlying report or detailed reasoning supporting these figures is not yet made public. Therefore, greater transparency and disclosure could strengthen the policy.

The pass-through conundrum

The Government has been categorical that merchants cannot separately pass MDR on to customers. Consumers will pay the posted price; the fee is borne within the merchant-side payment ecosystem. However, it must be understood that the economic incidence of a cost and the legal identity of the payer are not necessarily the same.

With the prohibition on passing-through, a restaurant may not be able to realistically increase the bill only for consumers opting for UPI as the payment option, a retailer cannot add an “MDR” line to one invoice and remove it from another, and hence, the more conventional response to an increase in operating costs for a restaurant or a retailer would automatically be to incorporate that cost into overall pricing—regardless of the mode of payment. 

Further, the FAQs assume that merchants will absorb MDR as a routine operating cost. But the behaviour already being reported among merchants suggests that this assumption may be overly optimistic. Recent reports already indicate that some restaurants and traders are considering higher prices, a greater preference for cash, or discouraging UPI for larger transactions.

When pricing changes behaviour

The ₹2,000 threshold also creates an obvious incentive to structure payments around the threshold. There have already been reports of a private portal called “One999” claiming to split larger UPI amounts into multiple sub-₹2,000 QR payments. The portal’s actual operation remains unclear and there is no indication that it is an NPCI-authorised mechanism.

Nevertheless, the episode illustrates the problem: when a regulatory cost changes sharply at an arbitrary transaction value, users will have an incentive to change how transactions are structured.

That is particularly significant in a system whose greatest achievement has been simplicity.

The economic case for a different approach

The Government’s framing treats the ₹20,000 crore infrastructure cost as a line item that must be matched by a corresponding revenue stream from MDR. But sound economic policy does not work that way. The true cost of any levy includes not just the revenue collected but also the economic distortions it creates—what economists call the “deadweight loss” of taxation. If MDR causes merchants to prefer cash, consumers to restructure payments, and digital adoption to slow, then the policy may cost more than it recovers.

There is a compelling case for the banking sector and the Government to absorb these costs rather than passing them to merchants. UPI generates what economists term positive externalities—benefits that flow to parties beyond the immediate transaction. Financial inclusion, formalisation of the informal economy, improved tax compliance, and reduced costs of cash management all accrue to the Government and the banking system. When an activity generates such externalities, standard economic theory suggests it should be subsidised, not taxed, because imposing costs leads to socially suboptimal levels of adoption. Banks themselves benefit from digital payments through lower branch costs, richer transaction data, and cross-selling opportunities—giving them an economic rationale to treat UPI infrastructure as a strategic investment rather than a cost centre.

Behavioural economics adds another dimension. Research consistently shows that even minimal transaction costs can disproportionately alter behaviour—a phenomenon that helps explain why UPI’s zero-cost simplicity drove such rapid adoption. The psychological friction introduced by MDR, however small in nominal terms, may have effects far exceeding its monetary value. This is the very friction that UPI was designed to eliminate.

The inconsistency in public spending priorities is also worth noting. The same Government that commits substantial sums to various forms of discretionary and welfare expenditure is now seeking to impose a cost on one of the most successful instruments of economic formalisation. Public funds are routinely deployed for programmes with limited or contested economic returns, yet UPI—a system that demonstrably expands the tax base, reduces black money, and brings millions into the formal financial system—is expected to recover its costs from the very ecosystem that made it successful.

There is a further dimension that implicates India’s economic sovereignty. UPI is indigenous digital infrastructure—conceived, built and operated in India, with transaction processing and data remaining within the country. The introduction of MDR creates an unintended incentive for merchants and consumers to shift towards credit card payments processed through international networks such as Visa and Mastercard. Unlike UPI, every credit card transaction routed through these networks involves payments to foreign entities for processing, network access and brand licensing—a continuous outflow of foreign exchange. By making UPI a charged service, the MDR framework risks undermining one of India’s most successful examples of Atmanirbhar Bharat and inadvertently channelling transaction revenue to foreign payment networks. Strengthening UPI’s competitive position against international card networks should be a policy priority, not an afterthought.

Does this mean UPI is moving ten steps back?

The irony is that the Government is introducing MDR precisely to fund the resilience, innovation and expansion of UPI. The FAQs expressly identify cybersecurity, technological development and international expansion among the reasons for the new revenue model.

Yet a revenue model that encourages merchants and consumers to prefer cash for higher-value payments will generate an obvious competing cost. The RBI Governor’s earlier observation that “someone” ultimately has to bear the cost of UPI is relevant here. The Government has also previously funded the ecosystem through subsidies designed to promote digital payments. Former RBI Governor Duvvuri Subbarao has since argued that charging higher-value transactions can be a way of financing the system without undermining its broader benefits.

The question, therefore, is not whether UPI has a cost. It does. The question is whether that cost should be recovered through a model that creates thresholds, incentives to restructure payments and potential pressure on merchants who have already reorganised their businesses around digital payments.

The Government states approximately 96% of P2M transactions will remain unaffected. That is significant. But UPI’s success cannot be measured only by the percentage of transactions that remain free. It must also be measured by what happens to the transactions that fall outside that percentage—and how merchants and consumers respond to the new incentives.

UPI is no longer merely another payment product. It is critical digital infrastructure that has generated benefits extending beyond payment processing—to financial inclusion, formalisation, merchant digitisation and India’s ability to export its digital public infrastructure model.

Therefore, UPI undoubtedly needs to become financially sustainable in the long run. However, that sustainability should not come at the cost of the very adoption, simplicity and trust that made UPI successful in the first place.

The present framework risks doing exactly that. A ₹2,000 threshold can encourage transaction splitting; a ₹1 lakh monthly threshold may capture ordinary businesses rather than only genuinely small merchants; and a prohibition on direct pass-through does not eliminate the underlying economic cost to merchants. Most importantly, the policy risks reintroducing friction into a payment system whose defining advantage has been the absence of such friction.

The Government has understandably focused on protecting the vast majority of transactions from MDR. But the success of UPI cannot be measured only by how many transactions remain free. It must also be measured by whether merchants continue to prefer digital payments, whether consumers continue to use them naturally for higher-value purchases, and whether the ecosystem remains simple enough that nobody has to think twice before choosing UPI.

There may be a case for asking the UPI ecosystem to contribute towards the cost of maintaining and expanding it. But the sustainability of UPI should not be secured by creating incentives that weaken its adoption or complicate its use. Therefore, while the introduction of MDR may be considered one step ahead in financing UPI, it risks putting it ten steps behind in preserving what made it work.