The Golden Rule: Standard UPI is Still Free
First, let's clear up the biggest misconception. For the vast majority of transactions, UPI remains free for both customers and merchants. When a customer pays you directly from their bank account using a UPI app like PhonePe, Google Pay, or Paytm, there
is no Merchant Discount Rate (MDR) or transaction fee. This core principle of bank-to-bank UPI transfers has not changed. The government has repeatedly clarified that everyday UPI use will stay free for consumers and most merchants to encourage digital payment adoption.
Understanding the Interchange Fee on PPI
The confusion stems from a specific charge called an interchange fee. This fee is not on all UPI payments, but only on transactions made using Prepaid Payment Instruments (PPIs). PPIs are essentially digital wallets or pre-loaded cards where users can store money, such as the Paytm Wallet, PhonePe Wallet, or Sodexo vouchers. In early 2023, the National Payments Corporation of India (NPCI) introduced an interchange fee of up to 1.1% on PPI merchant transactions over ₹2,000. This fee is meant to create a sustainable revenue model for payment companies that invest in the PPI ecosystem.
Which Transactions Attract This Fee?
This charge only applies when a customer pays a merchant using their PPI wallet balance for an amount greater than ₹2,000. For instance, if a customer scans your UPI QR code and chooses to pay from their Paytm Wallet balance of ₹2,500, that transaction is liable for the interchange fee. However, if the same customer pays you by scanning the same QR code but selects their linked bank account as the source, there is no charge, regardless of the amount. The fee also does not apply to peer-to-peer (P2P) transfers or payments to small merchants with projected monthly UPI transactions of ₹50,000 or less.
Who Actually Pays the Charge?
Crucially, the customer making the payment does not pay this fee. The interchange fee is a charge paid by the merchant's bank (the acquirer) to the customer's wallet issuer (the PPI provider). However, the merchant's bank or payment processor can recover this cost from the merchant, typically by levying an MDR. So, while the customer's experience remains seamless and free, the merchant might see a small deduction on certain high-value wallet transactions. This cost is not passed on to the customer at the point of sale.
Recent Developments: A New Bill for MDR
Adding to the discussion, the Lok Sabha passed a bill in August 2026 amending the Payment and Settlement Systems Act. This bill empowers the government to potentially introduce a nominal MDR on some UPI transactions in the future, separate from the existing PPI interchange fee. Government officials have clarified that this is an enabling provision to ensure the long-term sustainability of the UPI network. They have stressed that any future MDR would apply only to a limited set of high-value merchant transactions, would be set at a nominal rate, and would not affect consumers or small businesses.
What Should Your Business Do?
For now, most businesses will not notice any significant change. Since NPCI data suggests over 99% of UPI transactions are bank-to-bank, the PPI interchange fee affects only a tiny fraction of payments. There is no need to stop accepting UPI or wallet payments. The best practice for business owners is to review the terms and conditions from your payment service provider or bank. Check your settlement reports to understand if any MDR is being deducted for high-value wallet transactions. Staying informed about these nuances will help you manage your costs effectively without disrupting the convenient payment experience for your customers.
