Making UPI payments fee-based for some transactions could enhance mental reservations against digital payments -- which have largely been overcome -- once more. Do we want to regress?, asks R Jagannthan.
Key Points
- UPI infrastructure costs are significant, but its broader economic and social benefits outweigh these expenses.
- Charging MDR on higher-value transactions could encourage merchants to pass costs to users or return to cash.
- Free UPI reduces dependence on physical currency and avoids the substantial costs of printing notes and minting coins.
- Digital payments improve traceability, eliminate change-related losses and support transactions during temporary cash shortages.
- UPI should remain free because it functions as public infrastructure with substantial benefits for the wider economy.
With the passing of the Taxation and Other Laws (Amendment) Bill 2026, intended to enable the levy of a merchant discount rate (MDR) on UPI-based payments, opinion is divided on whether such payments should forever remain free or not.
The law is currently a mere enabler, and the assumption is that users will never have to pay anything for payments via the Unified Payments Interface or UPI.
Some higher-value transactions may incur costs payable by merchants offering this option to users.
Those in favour of MDR suggest that ultimately someone has to pay for the expenses incurred in maintaining the UPI infrastructure, but others point out that this will in effect make UPI costlier for higher-value payments as merchants may ultimately pass this cost on to users.
MDR could drive some of these payments to cash, though the ease of using UPI makes such decisions difficult for any merchant.
In the case of credit cards, some merchants do charge users an amount equivalent to their MDR costs, especially if their margins are thin.
If there is a long-term cost to merchants from offering UPI options for higher-value transactions, they will find some way to pass it on to users.
It is worth seeing the argument from a perspective that does not limit itself to asking how UPI infrastructure costs ought to be funded.
A better question to ask is: Are there broader benefits to the economy and society by absorbing these costs, or are these costs too high for the system to bear indefinitely?
The costs involved are not small: They are estimated to be between Rs 10,000 crore and Rs 20,000 crore annually, but precise costs are difficult to estimate because the infrastructure for UPI payments is often shared by a bank's broader payments systems.
Some industry estimates put the cost at Rs 0.40 to Rs 1 for a single UPI transaction, especially if one adds the need to invest more in cybersecurity in the age of artificial intelligence-led frauds.
One has to consider the other side of the equation: The wider systemic benefits of continuing to subsidise free UPI transactions.
There is also the moral question: Why should a country that, almost without thought, offers free power to farmers, free bus rides to women, and gives gold for weddings balk at marginally subsidising people who are actually willing to pay digitally for the things they buy?
UPI Cuts the Cost of Cash
First, the real cost of UPI is not the money spent in maintaining the infrastructure, but the opportunity cost of not having it.
What would we be spending as a country if UPI were not there?
What if we had to use cash, notes and coins to conduct those same transactions?
Not only would cash demand spike, but the costs to enable those transactions would also rise.
Currently, Rs 10 and Rs 20 notes cost around 95 paise to print, but higher value notes cost more, as they need more security features to prevent counterfeiting.
The proposal to print currency notes on polymer will cost even more, though these notes could last longer.
Coins of Rs 5 and Rs 10 cost even more to mint -- at an estimated Rs 3.6 and Rs 5.5 per coin, respectively.
If the central bank and government pay for all the printing and minting of these currencies, why should UPI be any different, when it actually reduces costs on printing and coining?
Second, there is the issue of traceability of payments and money flows. While MDR will only cover higher value transactions, the very fact that fees are being charged for what was once free will make ordinary users wonder if they too should use more cash in transactions.
From personal experience one knows that small merchants and service providers (taxi services, doctors, carpenters, plumbers and electricians) like the idea of cash payments if they were made available.
Making UPI payments fee-based for some transactions could enhance mental reservations against digital payments -- which have largely been overcome -- once more. Do we want to regress?
Third, UPI payments enable precise amounts to be transacted without loss to any party, buyer or seller: If your bill is Rs 29.50, you don't have to forgo 50 paise because of the absence of change in your wallet.
This is not an insignificant benefit for small value transactions, even though the current thinking is not about charging fees on such payments.
Fourth, the logic of the MDR fee is that it can help cross-subsidise smaller value free transactions -- which are at the heart of UPI acceptance among the wider population.
But this argument is not strong enough to overcome the other benefits of keeping UPI free for all right now.
Fifth, banks already do many free digital transactions through Real-Time Gross Settlement (RTGS), National Electronic Funds Transfer (NEFT), Immediate Payment Service (IMPS) and credit and debit cards.
The Reserve Bank of India charges no fees for RTGS, NEFT and IMPS. Why then impose the same on UPI, where the only big difference is the volume of transactions, not value?
The volumes are essentially because they replace cash in small value payments, and are friction-free at the retail end, bandwidth availability being the only constraint.
The case for trying to impose charges on UPI transactions above a certain value -- which must be far fewer in number -- is less than obvious, unless the idea is to benefit fintechs.
Sixth, keeping UPI free will ensure that payments technology remains in sovereign hands.
The RuPay debit card dominates domestic payments precisely because it was given a free run to displace fee-charging foreign payment systems like Visa and Mastercard. Why give up this advantage in UPI?
UPI's Role Beyond Cash
Seventh, the widespread use of UPI for even large-value transactions allows the government to overcome any temporary shortfall in the availability of higher-value notes at the local level.
This happens during election time, when politicians draw and dispense large amounts of cash to woo voters, and local shortages occasionally develop.
The very existence of zero-cost UPI enables normal transactions to be unaffected by temporary cash shortages.
Printed during demonetisation, Rs 2,000 notes have been withdrawn from circulation, and it is not inconceivable that printing of Rs 500 notes could, at some point, be whittled down to discourage black money transactions. UPI is the logical way to fill this gap.
The conclusion is simple: Currently, the social and economic advantages of free UPI grossly outweigh the infrastructure costs.
UPI is a public good, and hence worth keeping free unless costs, for some unforeseen reason, suddenly start ballooning beyond tolerable limits at some future date.
The argument for charging a fee on public goods is weak.
Feature Presentation: Aslam Hunani/Rediff
