By Arjun Singh
From 15th October, when a neighborhood chemist anywhere in India accepts a Rs 5,000 UPI payment for a customer’s monthly medicines, Rs 20 of it, a full 0.4%, will go to the bank as a fee.
Meanwhile, a business that receives Rs 5,00,000 through UPI will pay only Rs 300, which works out to 0.06%. In proportion to what they receive, the small chemist ends up paying almost seven times as much as the larger business. Charging for UPI is fair and arguably long overdue.
Running the system is expensive and it cannot rely on government subsidies forever. But the way the fee has been designed gets fairness exactly backwards. Big ticket transactions end up paying the smallest share, while the heaviest burden lands on the mid-sized business, small traders, the people who can least afford it. A fee meant to make UPI sustainable could end up burdening the very merchants and business who made it successful.
The rules are straightforward. From 15th October 2026, merchants will pay a fee of 0.4% on UPI payments of more than Rs 2000. This charge is called the Merchant Discount Rate, so a Rs 20,000 sale will cost the merchant Rs 80. This charge was introduced under the Payment and Settlement Systems Act, was shaped by the UPI Steering Committee’s deliberations, and it applies all over the country. Customers pay nothing extra and merchants cannot pass the fee on to them. Transfers between individuals remains free. Small merchants who receive up to Rs 1 lakh a month from UPI, QR codes are fully exempt. The fee is capped at Rs300 for any single transaction, which the 0.4% rate reaches at Rs 75,000. Any payment above this amount is charged the same Rs 300. Importantly this is not a tax, the money does not go to the government. It goes to the banks and payment apps that process each payment, such as the customer’s bank, merchants and apps like Google Pay and PhonePe.
This fee has solid justification. UPI handled transactions worth Rs 314 trillion last financial year, and each one depended upon banks and payment apps maintaining servers, checking for fraud and resolving complaints. Since 2020, banks and payment apps have not been allowed to charge merchants for UPI payment, so the government has had to cover part of the cost. This year’s budget allocates Rs 2000 crore for that subsidy, funded by all the taxpayers, even those who rarely use UPI. The government has said that this support was always meant to be a temporary bridge, not a lasting solution. And even at 0.4%, UPI remains far cheaper for merchants than card payments which usually cost 1% to 2%.
The issue is not the fee itself but how it has been structured. Up to Rs 75,000, every merchant pays the full 0.4%. Above that, the Rs 300 cap steadily pulls the effective rate down: to 0.3% on a Rs 1 lakh payment on Rs 2 lakh payment only 0.15% and just 0.06% on Rs 5 lakh. In other words, the bigger the transaction, the lower share it is charged. This might be harmless if the burden fell evenly, but it does not. At a local chemist, small electronics shop or a corner shop, most sales fall between Rs 2000 and Rs 75000, so these businesses pay the full rate on almost every transaction. The worst affected are those just above the Rs 1lakh-a-month exemption: too big to avoid the fee, but far too small to benefit from the cap. Many of them operate on slim margins, where losing 0.4% on every sale is not a rounding error. Meanwhile businesses handling large payments, which are usually better able to absorb costs, pay the least in proportion. A fee designed to be fair ends up demanding the most from those who can least afford it.
Fairness is not the only concern. Merchants cannot add the fee to the customer’s bill, but nothing stops them from quietly raising prices, so consumers will end up bearing the cost one way or another. More worryingly, the small businesses are not obliged to accept UPI at all. A shopkeeper losing 0.4% on every digital sale has every reason to steer customers back to cash, perhaps with a small discount. Every such sale removes one more transaction from the formal economy and sets back the digital India the government has spent a decade building. It would be deeply ironic if, the very shopkeepers who turned UPI into a national success become the first to turn away from it.
None of this means that the fee should be scrapped. It means it should be redesigned. Three straightforward changes would make it fairer. First, a tiered rate: 0.2% on payments between Rs 2,000 and Rs 20,000, the range that covers most everyday purchases at small shops, and 0.4% on anything higher. Second, a higher cap. Raising the limit from Rs 300 to around Rs 1000 would ensure that the largest payments pay their fair share rather than the smallest one. Third, a gradual rollout, with rates reaching these levels over two years instead of all at once, so that the merchants have time to adjust their prices and margins. Together, these changes would keep UPI financially viable as revenue lost on smaller payments would be recovered from larger ones. Crucially, they would spread the burden according to who can bear it, not according to who happens to deal in small markets.
Go back to the neighborhood chemist, giving up Rs 20 on a Rs 5000 sale, while a much bigger business pays only a fraction of that share. No one is demanding UPI to stay free forever; the system has earned the right to cover its own costs. But a fee which takes the most from those who can least afford it does not move UPI towards sustainability. It is a step away from the very people who made UPI successful. India got the technology right. Now it must get the fairness right too.
(Arjun Singh is a Class 12 student interested in finance, economics, and financial markets. This article was written with guidance from Rishabh Sethi, Professor at UPES (University of Petroleum and Energy Studies), whose mentorship helped refine its financial and analytical perspective.)
