UPSC Darpan

EconomyGS319 September 2026

UPI Begins to Charge — and Merchants Have Already Found the Workaround

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The news

From 15 October, regular merchant payments above ₹2,000 will attract a 0.4% merchant discount rate, capped at ₹300 for transactions of ₹75,000 or more. The National Payments Corporation of India has no immediate plans for a special daily cap on repeated UPI payments to the same merchant, a measure that could prevent businesses from splitting large bills into transactions of ₹2,000 or less. A merchant collecting ₹6,000 would pay ₹24 on one UPI payment; the merchant could instead request three payments of ₹2,000. NPCI's own published figures state that all person-to-person transactions remain free, that only 4% of person-to-merchant transactions are above ₹2,000, that essential and government services are free up to ₹2,000 with a flat ₹5 MDR above that, that all RuPay debit card transactions are free, and that small vendors receiving up to ₹1 lakh via UPI per month are exempt from MDR. NPCI also states that India has 120 crore mobile users but 56.5 crore UPI users, and that UPI handles 49% of the world's real-time instant payments. RBI Deputy Governor Shirish Chandra Murmu said concerns that MDR would spur a surge in cash transactions are unlikely to materialise and amount to an initial apprehension, noting the apparent paradox of rising digital transactions alongside rising cash in circulation, which he attributed to cash serving both as a means of transaction and a store of value. The All India Consumer Products Distribution Federation, which says it has around 450,000 FMCG distributors as members, wrote to the Prime Minister opposing the MDR, saying the burden should not fall disproportionately on traders. The Congress and the chairperson of the Parliamentary Standing Committee on Finance, Bhartruhari Mahtab, are in public dispute over whether Opposition MPs on the panel endorsed the recommendation; Congress MP Manish Tewari said the committee's recommendation was only to 'explore' a revenue model.

The chain in one line: Zero MDR made UPI universal → the system's cost had no payer → 0.4% MDR above ₹2,000 → merchants split bills below the threshold → NPCI declines a daily cap → the fee is avoidable by design

Static syllabus linkage

  1. What MDR actually is, in plain terms. The merchant discount rate is the fee a merchant pays, as a percentage of the transaction, to the chain of institutions that moves the money — the bank that hosts the merchant's account, the bank that hosts the customer's account, the payment app and the network. It is not a tax and it does not go to the government. UPI was built with this fee set at zero, which is why adoption was explosive and why the question of who funds the plumbing was never settled.
  2. NPCI is not a regulator and not a government department. The National Payments Corporation of India is an umbrella organisation for retail payments, set up as a not-for-profit company under the Companies Act at the initiative of the Reserve Bank of India and the Indian Banks' Association. It operates UPI, IMPS, RuPay, NACH, AePS and FASTag. The Reserve Bank regulates it under the Payment and Settlement Systems Act, 2007. Calling NPCI a regulator, which is a common slip, inverts the relationship.
  3. The zero-MDR mandate came from tax law, not payments law. The obligation on prescribed businesses to offer low-cost digital modes without charging MDR was introduced through Section 269SU of the Income-tax Act read with Section 10A of the Payment and Settlement Systems Act. That is why the debate over reintroducing MDR has run through the Finance Ministry and a Parliamentary Standing Committee on Finance rather than through the payments regulator alone.
  4. The ₹2,000 threshold matters more than the 0.4% rate. Because only 4% of person-to-merchant transactions exceed ₹2,000 on NPCI's own figures, the fee applies to a small slice of volume — but a much larger slice of value. The design deliberately protects small-ticket retail and charges high-value commerce, which is a defensible principle. Its weakness is that the threshold is per transaction, not per day or per merchant.

Why UPSC loves this

  1. Digital payments have moved from 'achievement' to 'policy problem'. Earlier questions asked about financial inclusion and the JAM trinity. The current question is about the sustainability of a public digital infrastructure — who pays, who captures the value, and what a public utility built by a not-for-profit company owes its users. That is a more demanding question and it is where the exam has gone.
  2. Digital Public Infrastructure is the framing UPSC now uses. Aadhaar, UPI and the account aggregator framework are increasingly examined together as 'DPI'. An answer that can explain the economics of DPI — near-zero marginal cost, enormous fixed cost, positive externalities — is answering the question behind the question.
  3. The parliamentary-committee dispute is itself examinable. A public disagreement over what a Standing Committee recommended is a live illustration for a question on the role and limitations of departmentally related standing committees, particularly the convention that committee reports are collective and dissent must be recorded.

Prelims nuggets

  • The National Payments Corporation of India is a not-for-profit umbrella organisation for retail payments, promoted by the Reserve Bank of India and the Indian Banks' Association, and operating UPI, IMPS, RuPay, NACH, AePS and FASTag.
  • Payment systems are regulated by the Reserve Bank under the Payment and Settlement Systems Act, 2007.
  • Section 269SU of the Income-tax Act requires prescribed businesses to provide facility for accepting payment through prescribed electronic modes; Section 10A of the Payment and Settlement Systems Act bars charges on such prescribed modes.
  • Under the framework effective 15 October, MDR of 0.4% applies to person-to-merchant UPI payments above ₹2,000, capped at ₹300 for transactions of ₹75,000 or more.
  • Per NPCI, all person-to-person UPI transactions and all RuPay debit card transactions remain free, and merchants receiving up to ₹1 lakh per month via UPI are exempt.
  • Per NPCI, only 4% of person-to-merchant UPI transactions are above ₹2,000, and UPI handles 49% of the world's real-time instant payments.

Analysis

  1. A threshold priced per transaction invites splitting, and everyone knows it. A merchant collecting ₹6,000 pays ₹24 on one payment and nothing on three payments of ₹2,000. The arbitrage requires no technology and no intent to defraud — only a request to the customer. NPCI's decision not to impose a daily cap for now means the fee is, in effect, optional for any merchant willing to inconvenience the customer slightly. A revenue measure that the payer can avoid by rearranging the same payment is not a revenue measure; it is a tax on inattention.
  2. Splitting has costs that the fee was meant to avoid. Three transactions instead of one triples the message load on a system already carrying the world's largest volume of real-time payments — which is precisely the infrastructure cost the MDR was introduced to fund. If the response to the fee is fragmentation, the fee raises less revenue while raising the cost it was meant to cover. This is the sharpest analytical point in the story and it is worth making explicitly.
  3. The distributional politics are genuinely contested. The distributors' federation argues that thin-margin traders cannot absorb 0.4%, and on FMCG distribution margins that is arithmetically plausible. Against that, the merchant is the party that receives the payment, saves the cash-handling cost, and gains the credit history that the transaction record creates. A serious answer states both and notes that the incidence of the fee will not stay where the rule places it: in competitive retail it passes to the consumer, in concentrated retail it is absorbed.
  4. The Deputy Governor's cash paradox deserves more than a mention. Digital transactions and currency in circulation have both risen. The explanation offered — cash serves as a store of value as well as a means of transaction — is the standard one and it is probably right. But it also means the usual argument for MDR, that it will not push people back to cash because cash is inconvenient, applies only to the transactional motive. It says nothing about whether a fee at the till nudges a merchant to prefer cash, which is a different behaviour from a consumer hoarding notes.
  5. The exemption structure shows the policy is redistributive by design. Person-to-person free, small vendors under ₹1 lakh a month free, essential and government services free up to ₹2,000, RuPay free. The fee is aimed at high-value commercial transactions and at the organised merchant. That is a coherent design and defenders should say so, because the debate is being conducted as though a flat charge had been imposed on every UPI payment, which is not what the framework does.
  6. The real question is what the country wants UPI to be. If UPI is public infrastructure like a road, the cost belongs on the budget and MDR is a user charge on a public good. If it is a private payments utility that happens to be run by a not-for-profit, then users must fund it and zero MDR was always a subsidy with an expiry date. India has not decided which, and every argument in this dispute is really an argument about that unanswered question.

Possible Mains question

"The reintroduction of a merchant discount rate on high-value UPI transactions raises the question of how a digital public infrastructure should be financed. Discuss."

Model approach

  1. Define the terms before taking a position. One line each on what MDR is, what NPCI is and is not, and why zero MDR was mandated through tax law. Most answers on this topic fail because the reader cannot tell whether the candidate knows who charges whom.
  2. State the financing problem neutrally. Near-zero marginal cost per transaction, very large fixed and security costs, enormous positive externalities in formalisation and credit access. Any of three payers — the merchant, the consumer or the exchequer — can fund it, and each choice has a different distributional consequence.
  3. Evaluate the chosen design on its own terms. Threshold at ₹2,000, rate 0.4%, cap at ₹300, exemptions for P2P, small vendors and RuPay. Concede the design is progressive in intent. Then make the splitting argument, with the ₹6,000 example, to show that a per-transaction threshold is the wrong instrument for a per-merchant objective.
  4. Offer a specific alternative rather than a complaint. A monthly turnover threshold rather than a per-transaction one; or a flat per-transaction charge above a value rather than a percentage, which removes the incentive to split; or explicit budgetary support with a published subsidy figure so the cost is visible and debated annually.
  5. Conclude on the constitutional-scale question. End by naming what is really unresolved: whether UPI is public infrastructure to be funded from general revenue or a utility to be funded by its users. Say that the country should decide that question openly rather than through the drift of exemptions, because a decision made by drift is the one nobody can defend later.

Administrator's brainstorm

You are a Joint Secretary in the Department of Financial Services. Reports come in that merchants are routinely splitting bills to stay under ₹2,000. Do you recommend a daily cap?

Recommend against a per-merchant daily cap as the first instrument, because it punishes legitimate repeat customers and is hard to distinguish from genuine multiple purchases at a kirana store. Recommend instead moving the trigger from the transaction to the merchant: apply MDR above a monthly received-value threshold, which is already the basis of the small-vendor exemption, so the fee follows the size of the business rather than the size of the bill. Pair it with a data exercise before any rule change — ask NPCI for the distribution of same-merchant same-customer transactions within a short window, before and after 15 October. Rules written from anecdote get litigated; rules written from distribution data survive.

A consumers' association complains that merchants are refusing UPI above ₹2,000 and demanding cash. What enforcement do you have, and what do you use?

The legal hook exists — prescribed businesses must offer the prescribed electronic modes and cannot levy a charge on the customer for them — so refusal by a covered merchant, or a surcharge passed to the customer, is actionable. But enforcement against lakhs of small merchants is neither feasible nor wise. Use the visible instruments: a clear public statement that customer surcharging is prohibited, a simple complaint route inside the payment apps themselves where the evidence already lives, and action against a small number of large merchants where the pattern is systematic. The objective is to set the norm, not to prosecute the market.

The Department is asked to publish how much MDR revenue actually flows and to whom. Some in the industry resist. What is your position?

Publish. A fee levied on the public for a public digital infrastructure must be accountable, and the argument against disclosure — commercial confidentiality across banks, apps and the network — can be met by publishing aggregates rather than firm-level splits. The practical reason is stronger than the principled one: the entire political controversy exists because nobody can see where the money goes, and in the absence of a published number every participant is free to assert that someone else is capturing it. Recommend an annual published statement of MDR collected, its allocation across the chain, and the infrastructure spend it funded.