Digital payments need a sustainable funding model for future growth

The Lok Sabha's tax amendment Bill opens the door for future UPI merchant charges, reigniting the debate on funding India's fast-growing digital payments ecosystem

The Lok Sabha on Thursday passed the Taxation and Other Laws (Amendment) Bill, 2026, which, among other things, proposes to amend the Payment and Settlement Systems Act, 2007. This will give the Centre the powers to decide which modes of electronic payment will remain free and which may attract charges. Although the Bill does not specify any fee, rate or timeline, it creates the legal flexibility to revisit the zero-merchant discount rate (MDR) regime and could potentially pave the way for introducing the MDR on certain Unified Payments Interface (UPI) transactions. The proposal has revived the debate over whether India’s digital-payment infrastructure, one of the best in the world, can continue to operate indefinitely under a zero-fee model. Since January 2020, UPI and RuPay debit cards have been exempt from the MDR to encourage digital adoption. UPI currently processes nearly 660 million transactions every day, enabling seamless payments for everyone from street vendors to large retailers, and has become the backbone of India’s digital payments. 

However, while digital transactions are free for users and merchants, they are not free to operate. Banks, payment-service providers, payment aggregators, and the National Payments Corporation of India (NPCI) continue to bear the costs of maintaining, upgrading and securing the infrastructure. Thus, the sustainability issue is difficult to ignore. The 32nd report of the Standing Committee on Finance, presented earlier this year, pointed out that the government’s incentive scheme covers only 11 per cent of the industry’s actual costs and 14 per cent of the revenue that a normal MDR regime could generate. While the Union Budget allocated ₹2,000 crore this year to promote low-value UPI and RuPay transactions, the industry estimates that operating and expanding the payments ecosystem requires much more than that. As UPI is expected to add more users, continued dependence on government subsidies may constrain long-term infrastructure investment. This has prompted industry bodies and analysts to advocate a calibrated MDR, limited to large merchants and high-value transactions. Analyst estimates suggest that an MDR of 15-30 basis points (bps) on UPI transactions above ₹2,000 could generate annually ₹5,000 crore-10,000 crore by FY28. 

Notably, transactions above ₹2,000 constitute only 4-5 per cent of the transaction volumes but nearly 70 per cent of the transaction value, suggesting that a targeted MDR could improve financial sustainability without affecting most users. International experience also suggests that zero-MDR is not the only path to digital payment success. Brazil’s Pix and China’s real-time payment systems, for example, have operated with merchant charges of 30-40 bps, allowing payment providers to recover their cost while continuing to expand digital payment adoption. Besides, it is worth noting that nearly 90 per cent of the UPI transactions are routed through just two third-party payment apps, creating a near-duopoly. A sustainable business environment in terms of revenue will increase competition and bring more operators. At a broader policy level, it will be important that the future MDR framework remain simple. The policy priority should be to ensure continued investment in India’s digital payments infrastructure, which will help keep transaction costs low and not discriminate against low-value transactions.