India Proposes Legislation to Introduce Business Model for UPI Network

August 4, 2026

India has introduced new legislation that sets the legal framework to modify the business model behind the Unified Payments Interface (UPI). The proposed law creates a foundation that could allow financial institutions to charge merchants fees on specific transactions, ending the zero-merchant-discount-rate regime that has been in place since January 2020.

What Happened

The Indian government has introduced legislation that opens the door to potential merchant charges on UPI payments. Operated by the National Payments Corporation of India (NPCI), UPI processed 23.66 billion transactions worth ₹29.88 trillion (approximately $313.4 billion) in July alone. Since early 2020, businesses have accepted UPI payments without paying merchant discount rates (MDR), with the network relying primarily on state incentives to cover costs. The legislative move follows years of discussions among the finance ministry, the Reserve Bank of India, and payment companies regarding long-term funding for the rapidly expanding network.

Key Highlights

The new bill creates legal groundwork for reforming the zero-MDR policy without directly imposing specific fees.
Details regarding which transactions or merchant categories will face charges are left to be defined in subsequent rules.
Fintech executives and banks support the shift to fund necessary investments in infrastructure, IT, innovation, and cybersecurity.
Brokerage estimates from Jefferies suggest charging fees on higher-value transactions could generate ₹50 billion to ₹100 billion ($525 million to $1.05 billion) in annual revenue by fiscal 2028.
Reports indicate officials may restrict fees to larger merchants rather than applying them across all businesses.
Data from Bernstein shows transactions above ₹2,000 represent around 4% of total transaction volume but account for nearly 70% of total payment value.
Major payment app providers like PhonePe and Google Pay, which command nearly 80% of UPI transaction volume, could see revenue impacts depending on fee distribution rules.

Why This Matters

As UPI transaction volume grows, banks and fintech startups face rising infrastructure and operational costs. Amrish Rau, chief executive of Pine Labs, publicly welcomed the legislation, stating on social media platform X that financial entities need sustainable revenue streams to fund IT investments, cybersecurity, and global expansion. Allowing companies to collect fees from merchants while keeping peer-to-peer and general consumer payments free aims to create a viable financial model without dampening consumer adoption.

What to Watch Next

Future regulatory updates will specify the exact transaction thresholds, fee percentages, and eligible merchant classifications. Stakeholders will monitor how fee revenues are split among banks, payment gateway providers, and app operators. Additionally, international markets where UPI currently operates—including Singapore, France, and the United Arab Emirates—will track how these regulatory adjustments impact the payment ecosystem.

Frequently Asked Questions

Will general consumers have to pay fees for using UPI?

No, the proposed changes focus strictly on merchant transaction fees, keeping consumer and peer-to-peer payments completely free.

Which transactions are expected to be affected?

Reports suggest potential fees may focus on larger merchants or transactions above ₹2,000, which make up about 70% of total transaction value despite representing only 4% of volume.

Source: TechCrunch