National Payments Corporation of India (NPCI) has implemented a charge of 0.4% on UPI payments above Rs 2,000.
This fee will be given to banks and payment processors, which will be paid by the merchants.
Merchant Discount Rate or MDR is a fee charged within the merchant payment ecosystem.
The customer will not have to pay this fee while transacting through UPI. Person-to-person (P2P) UPI transfers will continue to be free while merchant payments up to Rs 2,000 will also remain free.
The government has said that it will not have any impact on the transactions of about 96% customers and shopkeepers. When you make payment to a shopkeeper in exchange for purchasing an item, it is called a merchant transaction.
From October 15, the cost will change for merchant transactions above Rs 2,000. MDR is the fee charged for accepting digital payments. Under the new framework, 0.4% MDR will be levied on normal UPI person to merchant (P2M) transactions of more than Rs 2,000.
For transactions of Rs 75,000 or more, MDR will be limited to a maximum of Rs 300 per transaction.
The important thing is that according to NPCI's FAQ, shopkeepers cannot pass the burden of MDR on customers. The customer will have to pay the same price as shown by the merchant.
In such a situation, the question arises that when the government is promoting digital payments and wants to reduce the use of cash, then why did it decide to bring MDR?
The Finance Ministry says that the new MDR structure will help in making UPI self-reliant, will encourage its further expansion in rural and semi-urban areas and will maintain its competitiveness. This will also ensure that most payments remain free.
Ajay Srivastava, director of Delhi-based think tank Global Trade Research Initiative (GTRI), says, "The rationale behind imposing transaction fees in UPI is that it should become self-reliant on the economic front. I also think this is a good thing. Based on analysis of RBI data, I believe that the annual cost of managing UPI ranges from Rs 2,500 crore to Rs 8,000 crore.
"Suppose it is costing Rs 10,000 crore annually to manage it, then should the government take it as a fee? The effect of the fee on UPI payments will be that people will limit its use. Will move towards cash.
“There are also huge expenses involved in cash printing, distribution and managing the cash economy. It costs six to seven thousand crore rupees just to print notes. If the rest of the management is included, Rs 15,000 to 20,000 crore will be spent annually. I believe that if UPI transactions are reduced due to MDR then the government will not be able to save at all.
Congress President Mallikarjun Kharge and Leader of Opposition in Lok Sabha Rahul Gandhi on Tuesday alleged that this step was the result of the government bowing to American pressure.
In March this year, the United States Trade Representative (USTR) had flagged India's digital payments policies favoring domestic companies as a hindrance to foreign trade.
USTR had said that it has expressed concern about the inability of American electronic payment services suppliers to join the UPI ecosystem.
USTR had said, "In November 2020, NPCI announced a 30 percent market share limit for third-party app suppliers initiating online payments through India's UPI. This limit was set based on the number of transactions."
"This rule was to be implemented from January 2023, but NPCI extended the deadline for its implementation several times. Now this limit is to be implemented from December 2026. By December 31, 2025, two US-owned payment companies were together processing more than 80% of UPI transactions. These companies are Walmart-backed PhonePe and GooglePe.
Last year, the government had abolished the 6% Google tax amid tariff pressure. America had said that digital services tax is against its tech companies like Apple, Amazon, Google and Facebook.
India is not the only country whose payment system is being monitored by America.
In July 2025, Brazil's instant payment system Pix came under the target of US President Donald Trump.
On July 15 last year, the US launched an investigation into Brazil's alleged "unfair trade practices", saying it would investigate whether the South American country is discriminating against American companies to promote its electronic payment system Pix.
American company Meta's messaging platform WhatsApp launched a digital payment system in Brazil in June 2020, but just a week later the central bank there effectively banned the service based on concerns related to competition and data privacy.
WhatsApp got permission to restart Pix six months after its launch. At the time the service was blocked, WhatsApp said it believed Brazil's central bank was concerned that the messaging app's payment service could compete with Pix.
GTRI Director Ajay Srivastava says, "The government has taken this decision under American pressure. This can be understood from America's National Trade Estimates Report 2026. USTR issues it every year. In this he lists America's complaints against countries all over the world. It clearly says that American companies are suffering losses due to the policy of a particular country.
“There are many complaints listed against India also. One of them is the complaint that the Indian government is supporting UPI and RuPay, which is causing losses to American companies. After the introduction of UPI, transactions through MasterCard and Visa have reduced. It is not that they have completely disappeared. They have not been banned in India, but have reduced. Currently no transaction fee can be charged in RuPay Debit. Because of that people are using credit cards less.
Ajay Srivastava says that there is a whole series of government actions in this matter. Recently, the Department for Promotion of Industry and Internal Trade of the Government of India had approved FDI in e-commerce.
''This was also an American demand. American companies Amazon and Walmart will benefit from this. One thing people forget is that even though MasterCard and Visa transactions are decreasing because UPI is advanced technology, 80 percent of the transactions in UPI are being done by American companies only, Google Pay and PhonePe.
But Andy Mukherjee Ajay, columnist of American media outlet Bloomberg, sees it completely differently and is supporting the government's decision.
Andy Mukherjee had written in his column on August 21 last month, "Prime Minister Narendra Modi's government is trying to save the four trillion dollar annual industry from disintegrating under the burden of unprofitable success. This is absolutely the right step. The opposition has called this an anti-people move and alleged that it is a surrender of financial sovereignty to the Trump administration at the behest of Visa and MasterCard.
It is not difficult to understand the connection between the Modi government's decision and America.
In the USTR 2026 report, special concern has been expressed regarding UPI. The report says that American electronic services suppliers are not able to participate in UPI on a level playing field.
UPI is operated by NPCI, which is a semi-government organization.
It also has its RuPay cards, which are accepted more widely than Visa and MasterCard. This hurts the American credit-card business.
Andy Mukherjee has written, "The change that is going to happen has nothing to do with credit cards. This is related to debit transfer. There are two types of it. Person-to-person transfers account for 70% of total transactions, which must remain free. The debate is about the remaining 30%. That means merchant payments of more than one trillion dollars annually.
“Walmart and Google, with huge financial muscle, drove the expansion of UPI and gained access to valuable data on the spending of 140 crore Indians. But his role in this entire system was from the consumer side. Processing nearly a trillion dollars in annual transactions and making no money is not a sustainable system. They provide 24/7 merchant payment facility.
Andy Mukherjee writes, “Processing more than 20 billion transactions every month requires huge investments in servers, compliance systems and cyber security. Fraud cases occur on a large scale and consumers expect that banks or fintech companies will compensate for their losses. Declining government subsidies are currently covering the cost of this infrastructure to some extent, but India, which is facing financial pressure, cannot afford it forever.
But Ajay Srivastava does not agree with the argument that Google Pay and Phone Pay are not earning. “India has already given American tech companies extraordinary access to UPI,” says Srivastava. Through these platforms, American companies also get very valuable information related to the spending behavior of millions of Indians. American companies are using it to expand their business. Collecting data on the spending habits of Indian consumers is not a free service.
"This encourages companies involved in payment systems to invest in and expand payment infrastructure," Mandar told Bloomberg. At present there are more than 50 crore users of UPI, but its growth has now come to a standstill. In such a situation, the income from MDR becomes important to connect and retain the next phase of users.
