India Revives Merchant Fees on Digital Payments as Zero-Cost Experiment Ends

India is reviving merchant fees on digital payments through its Unified Payments Interface (UPI), ending a six-year experiment with zero-cost transactions that lawmakers have called unsustainable. The Taxation and Other Laws (Amendment) Bill, introduced in the Lok Sabha on August 4-5, 2026, would allow banks and payment service providers to charge Merchant Discount Rates (MDR) on select UPI transactions.

India banned MDR on UPI and RuPay debit card transactions back in January 2020 as part of a push to get people comfortable with digital payments. However, UPI processed a staggering 241.6 billion transactions worth ₹314.2 lakh crore in fiscal year 2026, a 30% year-on-year jump in volume.

The proposed fees are designed to be surgical rather than sweeping, with MDR rates landing somewhere between 5 and 7 basis points, or less than 0.5%, and would only apply to transactions exceeding ₹2,000 made by larger merchants with annual turnovers of roughly ₹1-1.5 crore.

The government has earmarked a ₹2,000 crore budget for FY27 subsidies, signaling it plans to continue supporting the ecosystem even as private revenue returns. The selective application matters too, as exempting small merchants and peer-to-peer transfers avoids the political backlash that killed MDR in the first place.