UPI Merchant Fees Return: What the PSS Act Amendment Means for India's Small Businesses

Posted on 28th Aug 2026 06:15:14 in Business, Digital Marketing

Tagged as: UPI, merchant discount rate, digital payments, small business India, NPCI, fintech India

For more than six years, accepting a UPI payment has cost Indian merchants exactly zero. The printed QR code at the counter, the instant settlement, the absence of card-terminal rentals — the zero merchant discount rate (MDR) regime introduced in January 2020 turned the Unified Payments Interface into the cheapest payment rail any Indian business has ever had. That era is now formally winding down. On August 4, 2026, Finance Minister Nirmala Sitharaman tabled an amendment to the Payment and Settlement Systems (PSS) Act in Parliament, creating the legal basis for banks and payment companies to charge merchants a fee on UPI transactions, and the Lok Sabha passed the bill later in August. The zero-MDR era is not over yet — no rate has been fixed and no final notification has been issued — but the groundwork is laid, and every business owner in India should understand exactly where the fee line is being drawn.

What Just Changed: The PSS Act Amendment

The amendment does not itself impose any fee. What it does is remove the legal barrier that has kept UPI merchant payments free since January 2020, when the government scrapped the merchant discount rate to accelerate adoption of the then-young payments network. For the past six years, the system has effectively been run as public infrastructure, funded partly through government incentives — the Union Budget 2026 raised the allocation for UPI and RuPay incentives to Rs 2,000 crore — and partly through banks and fintech companies absorbing the cost of fraud checks, cybersecurity, servers and settlement. That model has become harder to sustain as volumes have exploded.

The numbers show why this matters. In July 2026 alone, UPI processed 23.6 billion transactions worth roughly Rs 29.9 lakh crore, according to the National Payments Corporation of India (NPCI), which operates the network. In the financial year that ended in March 2026, the network handled about 241.6 billion transactions — nearly 12,000 times the volume of its first full year. More than 550 million Indians now use UPI, and the system is live in some form in 11 countries beyond India. PhonePe and Google Pay, the two dominant apps, run on a rail that earns them nothing on merchant payments.

Industry executives have argued for years that this is unsustainable. Pine Labs CEO Amrish Rau put it bluntly: for UPI to reach deeper penetration and go global, fintechs and banks must keep investing in technology, innovation and cybersecurity — and they need a way to recover part of that investment. Reserve Bank of India Governor Sanjay Malhotra made the same point from the regulator's side: "Someone will have to pay the cost." For context, credit card transactions in India already carry an MDR of roughly 1.5 percent and debit cards up to 0.9 percent. UPI, at zero, has been the outlier.

Who Pays, Who Stays Free: The Proposals on the Table

No decision has been finalised, but policymakers are considering two broad approaches, according to sources familiar with the discussions. The first would charge an MDR on transactions above a specified value. The second would levy fees based on a merchant's annual turnover. The most-discussed proposal, reported by Reuters citing a government source, combines both: an MDR of 0.3 percent to 0.5 percent on transactions above Rs 2,000, applied only to merchants with annual turnover above Rs 1.5 crore. The government has also stated clearly that consumers and person-to-person UPI payments will remain free.

The design is deliberately narrow. Brokerage Jefferies calculated that transactions above Rs 2,000 account for only about 4 percent of merchant payment volumes — but roughly 67 percent of merchant payment value. Charging a small fee on that sliver would create a revenue pool of Rs 5,000 crore to Rs 10,000 crore a year for the payments industry by FY2028, Jefferies estimated, assuming a fee of 15 to 30 basis points. Bernstein arrived at a similar conclusion: the approach would preserve UPI's consumer-friendly model while finally giving banks and payment companies a real revenue stream. In short, the proposed fee is aimed at large-ticket payments at large merchants, not at the neighbourhood shop.

To put the structure simply:

• Consumers: stay free. All person-to-person payments remain free, per the government's stated position.
• Small merchants: under the main proposal, merchants with turnover below Rs 1.5 crore a year pay nothing.
• Larger merchants: may pay 0.3 to 0.5 percent, and only on individual transactions above Rs 2,000.
• Everyday low-value payments: untouched, since they fall under the threshold.

What This Means for Your Business

If your business turns over less than Rs 1.5 crore a year — which describes the overwhelming majority of India's small shops, service providers, kiranas and D2C sellers — the current proposal leaves you exactly where you are today: paying nothing to accept UPI. The fee, if implemented in this shape, would land on mid-sized and large merchants on their higher-value transactions, and even then at roughly a third of the credit card MDR.

Still, there are three reasons to pay attention rather than shrug this off. First, proposals can change before the final RBI notification, and the threshold-based design is not law yet. Second, research by economists Abhinav Motheram and Sharon Buteau found that merchant acceptance was not merely a result of UPI's growth but one of its key drivers — districts with stronger merchant networks saw higher UPI adoption. Their warning is that even a small fee can matter to merchants operating on thin margins, so the design details will determine whether the network keeps its frictionless quality. Third, consumer sentiment is sensitive: a 2024 LocalCircles survey found that 75 percent of UPI users said they would stop using the platform if transaction fees were introduced, though only 22 percent said they would be willing to pay. That survey measured user-side fees, which the government says will not happen — but it shows how carefully the optics of any charge are being managed.

There is a working precedent. Brazil's Pix, the world's other great instant-payment success story, is free for individuals but permits low-cost charges for businesses, and it remains one of the fastest-growing real-time payment systems in the world, used by more than 140 million people and 14 million companies. India's policymakers are studying exactly that balance: make UPI financially sustainable without disturbing the conditions that made it ubiquitous.

For a small business owner, the practical checklist is short. Keep an eye on your annual turnover bracket relative to the proposed Rs 1.5 crore line. Watch for the final RBI and NPCI notifications, which will set the actual rates, thresholds and effective date. If you are a larger merchant, start comparing the proposed UPI fee against what you already pay on card rails — even at 0.5 percent, UPI would remain significantly cheaper than credit cards. And for everyone else, the short version is reassuring: the everyday UPI payment at the neighbourhood counter is exactly what the government says it wants to keep free.

Sources

• Reuters — India paves way for return of merchant fees on digital payments
• TechCrunch — India moves to give its instant payments network a business model
• BBC — India built the world's biggest digital payments miracle. Now comes the bill
• Economic Times — India paves way for return of merchant fees on digital payments