A Decade of Free Payments Begins to Change
On 4 August 2026, India's Parliament amended the Payment and Settlement Systems Act — the foundational legislation governing the country's digital payments infrastructure — to create the first legal authority since 2020 to restore merchant fees on Unified Payments Interface (UPI) transactions. The amendment does not immediately introduce fees: the change enables a future merchant discount rate (MDR) on certain transactions above a threshold to be set by an NPCI-led committee. But the legislative change is significant precisely because of what it replaces. India eliminated MDR on UPI and RuPay transactions in January 2020 as a policy intervention to accelerate adoption, and that zero-MDR rule has been the defining feature of India's payments ecosystem ever since.
Finance Minister Nirmala Sitharaman clarified the government's position on 10 August 2026 as the Taxation and Other Laws (Amendment) Bill passed the upper house of Parliament: consumers will continue to make all UPI transactions free of charge. All person-to-person UPI transfers remain free indefinitely. Any potential fee applies only to certain large merchant transactions above a threshold that the NPCI-led committee has not yet finalised.
The Scale of What Is Being Governed
Before understanding why this policy change matters, it helps to understand how large UPI has become. In fiscal year 2026, UPI processed approximately 241.6 billion transactions with a total value of roughly ₹314.2 lakh crore — approximately $3.29 trillion. The system processed about 85% of India's digital transactions in FY2025-26. As of June 2026, UPI had 55.49 crore registered users (approximately 554.9 million), making it one of the largest retail payment systems on the planet by both volume and user count.
The concentration within UPI is striking: PhonePe and Google Pay together handle approximately 80% of UPI transactions by volume. This market structure — two dominant platforms managing four-fifths of all transactions — is itself a product of the zero-MDR era, during which platforms competed on user experience and distribution scale rather than on price or margin.
What Parliament Actually Changed
The Payment and Settlement Systems (Amendment) Act 2026 amends two key provisions. It removes the explicit prohibition on charging merchant fees for UPI and RuPay transactions that was introduced in 2020, restoring the legal framework that existed before the zero-MDR mandate. It also establishes a committee led by the National Payments Corporation of India (NPCI) to determine any future merchant discount rate, including the transaction thresholds, rate structure, and the categories of merchants to which charges would apply.
No MDR rates, thresholds, or merchant categories have been announced as of 19 August 2026. The committee must deliberate and publish its framework before any fee takes effect. The amendment is better understood as enabling legislation than as an immediate policy change: it restores the government's legal authority to introduce MDR; it does not introduce MDR itself.
Who Would Actually Be Charged
The government's framing, as articulated by Finance Minister Sitharaman, is that any fee would apply only to large merchants above a transaction value or volume threshold. The same class of business that previously paid MDR on card payments before the 2020 amendment. Small merchants, kirana stores, street vendors, and informal sector businesses — which have been among the greatest beneficiaries of UPI adoption — would not be in the charging category under the structure being discussed. The consumer-facing zero-cost model remains intact.
Why UPI Needs a Revenue Model
The sustainability of UPI's zero-MDR model has been a subject of debate in India's fintech industry for years. Banks and payment service providers bear the operational costs of processing UPI transactions — infrastructure, fraud monitoring, regulatory compliance, and reconciliation — without revenue from the transactions themselves. The government has compensated through annual subsidy disbursements to the payments industry, but these have not fully covered industry costs and have created uncertainty about long-term viability for some payment service providers.
A well-designed MDR structure — one that charges only large merchants, keeps rates far below card interchange benchmarks, and protects consumers and small businesses entirely — would give payment service providers a sustainable revenue model without reversing the financial inclusion gains that zero-cost UPI enabled for India's 554.9 million users over the past six years.
What the Change Means for Indian Fintechs and Payments Builders
For fintech companies in India and software teams building payments integration into products, the policy change has two near-term implications. First, any product that processes merchant payments will need to monitor the NPCI committee's MDR framework announcements and plan for the possibility that transaction costs become a factor in pricing models for merchant-facing features. The timeline is uncertain, but the legal authority now exists.
Second, and more strategically, the sustainability question that the amendment addresses is a positive signal for payments infrastructure investment in India. A payments system with a viable revenue model attracts private capital and sustains innovation more reliably than one dependent entirely on government subsidy. For fintech founders and software teams building in the payments layer, a commercially sustainable UPI ecosystem is the foundation that makes long-term product investment rational.
The Bottom Line
India's Parliament amended the Payment and Settlement Systems Act on 4 August 2026 to create the legal authority for UPI merchant fees for the first time since 2020. UPI processed 241.6 billion transactions worth approximately $3.29 trillion in FY2026, making it one of the world's largest retail payment systems, with roughly 85% of India's digital transaction volume. The change does not immediately introduce fees: an NPCI-led committee will determine the rate structure, thresholds, and categories of merchants subject to any future merchant discount rate. Consumer and person-to-person transactions remain free. For India's fintech sector and the software teams building payments products, the amendment is the first step toward a sustainable commercial model for UPI — one that preserves financial inclusion while creating the revenue foundation that digital payments infrastructure at this scale requires.
Frequently Asked Questions
What did India's Parliament change about UPI fees in August 2026?+
On 4 August 2026, India's Parliament passed the Payment and Settlement Systems (Amendment) Act 2026, which removes the legal prohibition on merchant fees for UPI and RuPay transactions that was introduced in January 2020. The amendment restores the legal authority to charge a merchant discount rate (MDR) on certain UPI transactions and establishes an NPCI-led committee to determine the rate structure, thresholds, and eligible merchant categories. No fees have been introduced yet — the amendment is enabling legislation that allows the committee to design and implement an MDR framework. Consumer and person-to-person UPI transactions remain free under the new law.
How big is UPI and who will actually be charged under the new policy?+
UPI processed approximately 241.6 billion transactions worth roughly ₹314.2 lakh crore (approximately $3.29 trillion) in fiscal year 2026, accounting for about 85% of India's digital transactions. As of June 2026, the system had 55.49 crore (approximately 554.9 million) registered users. Under the framework being discussed, any merchant fee would apply only to large merchants above a transaction value or volume threshold set by the NPCI-led committee — the same category that previously paid MDR on card payments before 2020. Small merchants, kirana stores, and informal sector vendors would not be charged. Consumer-facing transactions remain free.
Why did India eliminate UPI merchant fees in 2020 and why is it reconsidering now?+
India eliminated MDR on UPI and RuPay transactions in January 2020 as a deliberate policy intervention to accelerate digital payments adoption among consumers and small merchants. The strategy succeeded: UPI grew from hundreds of millions to 241.6 billion annual transactions by FY2026. The trade-off was that banks and payment service providers bore the operational costs of processing those transactions without revenue to cover them, with the government providing subsidy disbursements that have not fully compensated industry costs. The 2026 amendment restores the legal authority to introduce MDR because the adoption phase — the reason zero-MDR was introduced — has concluded, and a sustainable revenue model is now the priority for the system's long-term viability.
What should fintech companies and payments product builders do now?+
Fintech companies and software teams building payments features into products should monitor NPCI committee announcements closely, as the committee has not yet published its MDR rate structure, thresholds, or implementation timeline. Any product that processes merchant payments may eventually face transaction costs on large-merchant flows, which could affect pricing models for merchant-facing features. The practical steps now are to understand which merchant segments your product serves, map those against the likely threshold categories when published, and build flexibility into your payments pricing architecture. The enabling legislation is in place; the commercial framework will follow on the NPCI committee's timeline.
Written by
TechPillow Team
Sharing insights on technology, product development, and the Indian tech ecosystem.