End of Free UPI.
What Will It Change?
On 14 September, the Finance Ministry notified a framework allowing charges on UPI merchant payments. From 15 October, eligible person-to-merchant (P2M) payments above ₹2,000 will attract 0.4% MDR. Person-to-person (P2P) transfers remain free at any amount. The government estimates that 96% of merchant transactions will remain unaffected, with charges targeting larger payments.
The change follows Parliament’s August amendment to the Payment and Settlement Systems Act, empowering the government to specify which payments remain free. Incentive payments fell from ₹3,268 crore in FY2023-24 to ₹1,046 crore in FY2024-25, with ₹437 crore budgeted for FY2025-26, even as annual UPI transactions rose from 13,113 crore to 24,162 crore over this period. The FY2026-27 allocation is ₹2,000 crore. Within two days of the notification, a petition challenging the framework reached the Supreme Court.
Beyond the immediate impact, the bigger questions concern what this means for digital payment adoption and the message it sends.
What each payment channel costs
What the charge costs a merchant, and what has been happening to cash
What a merchant pays on a ₹10,000 payment, by rail.
Where the new UPI rate sits against the cards a merchant already accepts
Growth of UPI and ATM withdrawals
Whether the growth of UPI has pulled cash out of the system. ₹ lakh crore per financial year
Frank TakeOpen questions beyond MDR
On price, UPI remains the most accessible rail a merchant can accept. At 0.4% it costs less than half the ceiling on a non-RuPay debit card and about a fifth of a typical credit card rate. For roughly 96% of merchant transactions, and for all person to person transfers, nothing changes at all. Judged only on the number, this is a modest charge, and it is the cheapest way a merchant can take a large payment electronically.
The difficulty is in what the change communicates. For six years UPI was presented as free, and that simplicity is a large part of why it spread to 55 crore users and 741 banks. A merchant now has to consider whether a payment is above ₹2,000, and which category his business falls in. The ecosystem is therefore dealing with a different product from the one that was given and promoted.
Few answers are still evolving. The first is splitting. A payment of ₹3,000 taken as two payments of ₹1,500 carries no MDR, and no published rule prevents it. Will NPCI treat that as ordinary merchant behaviour or as avoidance?
The second is what merchants do. A charge that cannot be passed to the customer is a charge the merchant absorbs. Some merchants will fold the cost into prices. Others may begin to discourage UPI. Street vendors are outside all of this and will carry on as before, so any effect shows up in the middle and upper part of the merchant base.
The third is the direction of travel. Digital acceptance in India grew on the understanding that it was free at the point of use, and that understanding is part of the country’s own account of what it built. If merchants start to treat UPI as a cost, some of that traffic has to go somewhere, and the nearest alternative is cash. ATM withdrawals have fallen for three years, indicating in some ways that the need for petty cash was declining. Currency in circulation kept growing, which can possibly be aligned to economic activity in a growing economy. Whether 15 October gives cash the momentum to return is the thing worth watching.
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