Who pays for UPI now that zero MDR has ended
UPI's zero merchant fee ended by law on 14 October 2026. What UPI costs to run, what the subsidy covers, and what a 0.4% fee could change.
For nearly seven years, a shopkeeper in India could take a UPI payment of any size without paying anyone a rupee. That arrangement was written into law in January 2020. In 2026 the law was changed, a fee of 0.4% on some larger merchant payments was announced for 15 October, and then, two days before it started, it was put on hold until "after Diwali". This article explains what UPI costs to run, who has been paying, how big the gap is, what the new fee would raise, and what is still not known. It relies on news reports and commentary; the official NPCI and government documents were not opened for this piece, and that matters for how far the details can be trusted (see the evidence assessment).
Current situation
The key facts as they stand on 3 November 2026:
- Volumes keep rising. UPI handled 24.07 billion transactions worth Rs 29.37 lakh crore in September 2026, according to NPCI data reported by StartupTalky. That is up 23% in volume and 18% in value from September 2025, and about 802 million transactions a day. August 2026 was higher at 24.51 billion. NPCI's figures for October have been reported elsewhere as a new record, but this article uses only the September data it was able to open.
- The zero-MDR rule has lapsed in law. MDR stands for merchant discount rate: the fee a business pays its bank for accepting a payment, the way a mall takes a cut from the shops inside it. One legal-timeline explainer (Terra Insight) says the six-year zero-MDR framework ended by law on 14 October 2026, after the Taxation and Other Laws (Amendment) Act 2026 received presidential assent on 17 August 2026.
- A fee was announced and then deferred. NPCI's framework set a 0.4% MDR on eligible person-to-merchant (P2M) payments above Rs 2,000, capped at Rs 300 per payment. On 13 October the UPI and Services Steering Committee deferred the start, citing the festive season, and said a new date would be notified separately and that the fee would apply right after Diwali (The Week, 13 October 2026). At the time of writing no new date has been confirmed in any source opened for this article.
- Person-to-person transfers remain free. Sending money to a friend is outside the framework. The government has said consumers' UPI payments will stay free.
- The subsidy exists but is smaller than most cost estimates. The FY27 Budget sets aside Rs 2,000 crore for incentives on low-value P2M UPI and RuPay debit payments. Industry estimates of what UPI costs to run range from about Rs 5,500 crore to about Rs 20,000 crore a year.
The rest of the article takes each of these in turn.
What is this research about?
This is not a single study. It pulls together the public numbers on one policy question: UPI is the backbone of Indian retail payments, it runs on infrastructure that someone has to pay for, and since January 2020 the merchant fee that normally pays for it was set to zero. Who has been paying instead, how big is the bill, and what happens now?
How a UPI payment is paid for
When you scan a shop's QR code, several parties do work. Your bank (the issuer) checks your balance and debits you. The shop's bank (the acquirer) credits the shop. A UPI app such as PhonePe or Google Pay shows the screen. NPCI, the National Payments Corporation of India, runs the switch that connects them. Each has servers, fraud systems, customer support and compliance to fund. With cards, the merchant fee covers this. The Zerodha Varsity explainer notes that on a Rs 1,000 card swipe a small shop typically receives about Rs 975 to Rs 980, with the difference shared among the parties.
Why the fee was set to zero
Terra Insight's account of the legal history says that three pieces of the 2019 Finance (No. 2) Act worked together. Section 269SU of the Income-tax Act, effective 1 November 2019, obliged businesses with turnover above Rs 50 crore to offer prescribed electronic payment modes (UPI, BHIM-UPI QR and RuPay debit). Section 10A of the Payment and Settlement Systems Act, 2007 barred banks and system providers from charging payers or beneficiaries on those modes. Section 271DB set a penalty of Rs 5,000 a day for businesses that failed to offer them. Zero MDR began on 1 January 2020. The aim was to get digital payments to spread quickly, and they did.
Folo, a policy explainer, adds that before 2020 UPI P2M carried an MDR of up to 0.30%. Because the zero-fee rule sat in statute, only Parliament could change it.
How the law changed in 2026
According to Folo, the Taxation and Other Laws (Amendment) Bill, 2026 was listed for introduction on 5 August 2026. It did not itself set any fee. It moved the power to decide which payment modes stay fee-free from the statute to the central government, which can notify them. Kashmir Life, reporting a government statement on 9 August, said that once the bill passed, a UPI and Services Steering Committee headed by NPCI would decide on any MDR, and that any MDR would be "nominal" and much lower than card MDR. Terra Insight puts the sequence after that as follows.
Date · What happened (per Terra Insight)17 August 2026 · Presidential assent to the Amendment Act, narrowing Section 10A
14 September 2026 · Ministry of Finance notification
15 September 2026 · NPCI FAQ sets the new rates
16 September 2026 · Challenge filed in the Supreme Court
28 September 2026 · Supreme Court declines to pause the charges
13 October 2026 · NPCI defers the start to after Diwali
14 October 2026 · Zero-MDR framework ends by law
This timeline comes from one explainer. The date of the bill's passage and the Supreme Court steps are not confirmed here by a second source, so treat the table as a guide to the order of events rather than a legal record.
A reversal worth knowing about: on 11 June 2025 the Finance Ministry said on X that claims of an MDR on UPI were "completely false, baseless and misleading" (reported by the Tribune). That statement answered reports of a plan to charge on large-value payments. Sixteen months later a fee framework exists. Readers should hold policy statements in this area loosely.
How will this impact you?
The answer depends on who you are.
If you only send and receive money as a person, nothing changes. P2P transfers are outside the framework, and the government has said consumers will not be charged.
If you pay shops by UPI, you should not pay the fee directly. The reports describe the fee as falling on the merchant. Whether the merchant can pass it on in a higher price is not settled in the sources opened here: The Week says NPCI has not detailed this point. For purchases of Rs 2,000 or less, nothing changes at all.
If you run a shop, the fee depends on the size of each payment, not your total sales. A Rs 3,000 payment would carry Rs 12; a Rs 50,000 payment Rs 200; anything from Rs 75,000 up is capped at Rs 300. Small merchants are reported to be exempt below a monthly UPI inflow of Rs 1 lakh, though that detail comes from explainers of the NPCI FAQ rather than the FAQ itself. The calculator below turns the reported rules into rupees and into a share of your margin.
Try the calculator with your typical payment size, then move the margin slider to see how much of your profit on that sale the fee would take.
If you run a fintech or a payment app, the framework changes the economics of a product that has earned almost nothing from UPI itself. The sources opened here do not set out how the fee would be shared among the issuing bank, acquiring bank, app and aggregator, and some reported splits are unconfirmed, so no split is used in this article.
What does UPI cost, and who has been paying?
This is the heart of the question, and the honest answer is that nobody has an audited figure.
The cost estimates
The numbers differ because each uses different assumptions about what to count.
Estimate · Figure · Source as reportedPayments Council of India, 2022 · Rs 5,500 crore a year · Policy Circle
Other industry estimates, by 2025 · About Rs 10,000 crore a year · Policy Circle
PwC, FY24 · About Rs 12,000 crore · Zerodha Varsity
RBI-based extrapolation, FY25 · About Rs 20,000 crore · Zerodha Varsity
NPCI, citing industry estimates · About Rs 20,000 crore a year · Policy Circle
Industry estimate of subsidy needed for P2M · Rs 4,000 to 5,000 crore a year · Folo
Policy Circle says explicitly that these are industry estimates, not audited, and may use different assumptions. Zerodha Varsity calls its two figures rough. The RBI's own 2022 estimate, as the same explainer reports it, put the cost at 0.25% of transaction value, or Rs 2.50 on a Rs 1,000 payment. Read together, the plausible range is wide: roughly Rs 5,000 crore to Rs 20,000 crore a year, and the top of the range is four times the bottom.
The subsidy has been up and down
When zero MDR began, the government promised to compensate banks and payment companies through an incentive scheme for low-value P2M UPI and RuPay debit payments. Policy Circle and Folo give the annual figures, with some disagreement.
Year · Incentive (Rs crore) · NoteFY22 · 1,389 · Both sources
FY23 · 2,210 · Both sources
FY24 · 3,631 · Peak; both sources
FY25 · 1,046 · Policy Circle; Folo says 1,441 initial, revised to 2,000
FY26 · 437 · Initial budget; Folo says revised to 2,196
FY27 · 2,000 · Budget allocation
The FY25 and FY26 numbers are the problem. Policy Circle lists FY25 at Rs 1,046 crore and FY26 at Rs 437 crore (the initial allocation). Folo, citing PIB and Business Standard, says FY25 was budgeted at Rs 1,441 crore and revised to Rs 2,000 crore, and FY26 revised from Rs 437 crore to Rs 2,196 crore. Terra Insight also reports an FY26 outlay of Rs 2,196 crore. Budgeted amounts, revised amounts and actual payouts are different things, and the sources do not always say which one they mean. The chart uses the figures that two sources agree on, plus Terra Insight's and Folo's FY26 revision.
Folo reports that the Department of Financial Services told a parliamentary committee the incentive scheme covers about 11% of actual industry costs and about 14% of forgone MDR revenue. Nobody outside the committee has been seen here to publish how those percentages were calculated. Even so, the direction is clear: the subsidy has never been close to the cost estimates in any year.
Who made up the difference
By implication, banks, payment apps and NPCI absorbed it, and recovered it elsewhere or did not. Zerodha Varsity reports that the RBI Governor said in July 2025 that UPI will be "sustainable only if someone bears the costs", and that the Payments Council of India asked the Prime Minister's Office in March 2025 to introduce a UPI fee. Folo records that NPCI reported a surplus of Rs 1,552 crore in FY25 from its published accounts, which is a reminder that the network operator and the banks and apps that do most of the work are not the same entity.
What would the new fee raise?
Nobody has published an official estimate. What can be done is arithmetic with clearly labelled assumptions.
UPI processed 241.6 billion transactions worth Rs 314 lakh crore in FY26, according to Folo. Only a part of that is payment to a merchant, and only a part of that is above Rs 2,000. No source opened here gives the value share of chargeable payments, so the next simulator asks the reader to choose one. At an assumption that 10% of value is chargeable at an average effective rate of 0.3% (below 0.4% because of the cap and sector tiers), the fee would raise a little over Rs 9,000 crore a year before GST, against a cost estimate of Rs 20,000 crore. Change the sliders to see how far each assumption moves the answer.
A caution in the other direction: collection depends on behaviour. If merchants steer customers to cash or push small purchases below Rs 2,000, the chargeable share falls. Policy Circle warns that merchants may pass costs to customers or move to cash, and that collections may not cover operating costs. The estimate is also extremely sensitive to which cost figure is used.
Current limitations
What the evidence cannot yet show about the fee itself:
- There is no start date. NPCI said "after Diwali" without naming a day. Diwali 2026 falls in early November, but a date is not confirmed in any source opened here, and a separate report dated before the deferral suggested industry participants had asked for more time, even for January 2027. That report was not opened for this article.
- The fee rules have not been tested in practice. There are no observed effects on merchant behaviour, because no merchant has paid yet.
- Key operating questions are unanswered. The Week says NPCI has not said whether merchants can pass the charge to customers, or exactly which categories are covered. The Policy Circle commentary notes that the future of the incentive scheme alongside MDR revenue is unclear.
- There is a pending legal challenge. A Supreme Court petition was filed in September, and the court reportedly declined to pause the charges. The petition itself was not opened.
What the data cannot show about cost:
- The cost figures are rough, uneven in year and scope, and not audited. They mix operating costs, fraud losses and customer support in unknown proportions.
- The incentive scheme paid out on a fraction of UPI volume (low-value P2M), so even a perfect subsidy would not cover all costs.
Limitations and open questions
- Who will end up bearing the fee? Law may say merchants, but prices and cash discounts are set by the market. The sources do not contain data on pass-through.
- Will small merchants be protected? Policy Circle reports that NPCI proposes directing 5% of collections to a fund for small merchants, mainly rural and semi-urban. Whether that is enough, or even confirmed, is not known.
- What happens to market concentration? PhonePe and Google Pay held 45.64% and 32.26% of volume in August 2026 and Paytm held 8.03% (StartupTalky, citing NPCI app data). NPCI introduced a 30% cap on any single third-party app's share of volume in November 2020, and in December 2024 it extended the deadline for existing apps to 31 December 2026 (Business Today). The cap's own measurement rules and what will happen when the deadline arrives were not clear from the sources opened. If the fee is shared among apps and banks, concentration decides who earns most of it, which is why the two issues are connected.
- Does a fee slow adoption? Before 2020 the MDR was up to 0.30%, and UPI did not stop growing. But payment volumes then were smaller and today's economics are different, so the past is a weak guide.
- Does the government keep the subsidy? The Budget allocated Rs 2,000 crore for FY27 while the fee framework was being finalised. Whether the subsidy will shrink once MDR income flows is not stated.
- Where is the primary text? The FAQ of 15 September, the Finance Ministry notification and the Amendment Act were not opened. Details attributed to them here come from secondary reports and can contain errors.
What is coming next
- A start date for the fee. NPCI has said it will notify one and that it will be immediately after Diwali. One search result expected it in the second week of November; this is a projection, not a confirmed date.
- Any change to the framework. One report, which could not be opened in full, said the structure would stay the same. Treat that as unconfirmed.
- The Supreme Court case. The court asked for the Centre's response, per the earlier reports; further hearings could change the outcome. This is open and cannot be forecast.
- The 30% market share cap deadline on 31 December 2026, unless NPCI extends it again, as it has done twice before (Business Today).
- NPCI's monthly data. The first full month of data after the fee starts will be the earliest evidence of any change in behaviour. This is a forecast of when evidence will appear, not of what it will show.
Key takeaways
- UPI has not been free to run: industry and advisory estimates put the annual cost between roughly Rs 5,500 crore and Rs 20,000 crore, and the subsidy of Rs 2,000 crore in the FY27 Budget covers only a fraction.
- The zero-MDR rule ended in law on 14 October 2026, but the 0.4% fee on eligible merchant payments above Rs 2,000, capped at Rs 300, is deferred to a date NPCI has not yet announced.
- Person-to-person transfers stay free, and the fee as reported does not apply to payments of Rs 2,000 or less.
- On plausible assumptions the fee would cover only part of the running cost, and who bears it in practice depends on what merchants do with prices.
- Since the cost, subsidy and legal-timeline figures come from secondary sources that sometimes disagree, readers should check official NPCI and government documents before relying on any single number.
Evidence assessment
Confidence is Medium. The direction of the story is supported by several independent explainers and reports: zero MDR was legislated in 2019 and began in January 2020, the framework was changed in 2026, a 0.4% fee with a Rs 300 cap was announced and then deferred, and the incentive does not cover estimated costs. That is why it is not Low. It is not High for four reasons. First, no primary document (NPCI FAQ, government notification, Budget papers or the Act) was opened, so every rate and date is second-hand. Second, the cost estimates are rough and disagree by a factor of nearly four. Third, subsidy figures conflict between sources for FY25 and FY26. Fourth, the legal timeline rests mainly on one explainer, and the fee's start date and rules are not final. The Evidence label is Confirmed by 2+ outlets because the core facts, notably the deferral and rates, appear in more than one report, but several of the detailed claims (the legal dates, the cost estimates) rely on a single source each and are marked as such in the text.
Suggested follow-up
- Read NPCI's FAQ of 15 September 2026 and its deferral statement of 13 October 2026 in full, and the Taxation and Other Laws (Amendment) Act 2026, to check every rate and date used here.
- Watch NPCI's monthly UPI statistics for the first month after the fee starts, and its app-wise market share table.
- Follow the Supreme Court hearing on the challenge to the notifications.
- Read the Union Budget FY27 expenditure papers for the exact incentive figure and the parliamentary standing committee report cited by Folo and Policy Circle, to settle the subsidy history and the 11% and 14% coverage figures.
- Compare the UPI approach with how card networks price merchant fees: the RBI's 2017 circular on debit card MDR (0.40% capped at Rs 200 for small merchants, 0.90% capped at Rs 1,000 for larger ones, as Terra Insight reports) is the closest official benchmark.
Sources
- [The Week: NPCI defers 0.4% UPI merchant fee until after Diwali (13 October 2026)](https://www.theweek.in/news/biz-tech/2026/10/13/npci-defers-upi-mdr-until-after-diwali.html)
- [Policy Circle: UPI MDR isn't about card fees, it's about a lapsed subsidy](https://www.policycircle.org/opinion/upi-mdr-lapsed-subsidy/)
- [Folo: Free no more? The bill that could finally put a price on UPI](https://www.folo.one/deep-dives/upi-mdr-reimpose-amendment-bill-2026)
- [Terra Insight: UPI zero-MDR regime and Section 269SU, PSS Act](https://www.terra-insight.com/insights/upi-zero-mdr-regime-section-269su-pss-act-india/)
- [Kashmir Life: Govt says UPI to remain free for citizens, future MDR to apply only to limited merchant transactions (9 August 2026)](https://kashmirlife.net/govt-says-upi-to-remain-free-for-citizens-future-mdr-to-apply-only-to-limited-merchant-transactions-447168/)
- [The Tribune: No fee to be charged for UPI transactions, clarifies Finance Ministry (June 2025)](https://www.tribuneindia.com/news/business/no-fee-to-be-charged-for-upi-transactions-clarifies-finance-ministry)
- [Zerodha Varsity: Why UPI isn't actually free?](https://zerodhavarsity.substack.com/p/why-upi-isnt-actually-free)
- [StartupTalky: UPI transactions in September 2026](https://startuptalky.com/upi-transactions-september-2026/)
- [Business Today: NPCI extends 30% UPI market share cap deadline to December 2026](https://www.businesstoday.in/amp/tech-today/news/story/npci-extends-30-upi-market-share-cap-deadline-on-3rd-party-apps-to-december-2026-459171-2024-12-31)
Tags: UPI MDR NPCI Digital Payments Payments Policy