Keep it free for users, fund it from savings. In March 2017, "I argued in these pages that there was no justification for a Merchant Discount Rate on mobile payments, and that a less-cash India depended on keeping them free. That argument concerned an infant technology; it now has fresh urgency", writes R S Sharma.
Parliament passed Taxation and Other Laws (Amendment) Bill, 2026, re-writing Section 10A of Payments and Settlement Systems Act. That section barred any charge on BHIM-UPI and RuPay.
Amendment replaces bar with enabling provision, allowing government to notify in future which modes can carry a charge. No charge is imposed today. But door has been unlocked, and we should not walk through it.
Consider what UPI has become. In 2025-26, it carried 24,000 crore transactions — roughly 66 crore a day — worth about Rs 314 lakh crore, accounting for some 85% of India's digital retail payments and nearly half world's real-time payments. It is overwhelmingly system of small sums: average transaction about Rs 1,300, and 86% of merchant payments are below Rs 500. Such transactions involve vegetable seller, auto driver, kirana shop. A charge here is not a charge on commerce in abstract; it is a levy on smallest transactions of poorest.
After Aadhaar gave every Indian a digital identity, UPI is our most visible piece of digital public infrastructure — unlike identity, it runs on air. Banks and payment providers bear real costs, and under zero-MDR, they earn nothing directly from UPI transaction.
None of this means system can run on fumes. But then, is MDR the wrong instrument? It is an inheritance from card world, where issuer, acquirer and network each take slice, and where physical card, terminal and credit-default risk give fee something to recover. None of that exists for UPI. The point-of-sale machine is customer's own phone, on data he has paid for, there is no card, no terminal, no credit risk, and settlement is instant.
Let's apply "work-done" principle telecom regulation uses for interconnection — network is paid only for work it performs. When A pays B, bank makes debit entry, NPCI's settlement instruction, B's bank a credit entry; no cash moves. NPCI runs whole switch for about Rs 500 crore a year — some two paise a transaction. Cost of a fee would recover has all but vanished.
None of this means system providers bear no costs. Under zero-MDR, they earn nothing.If digitisation saves state and banks such sums, answer is not to claw money from merchants and consumers through MDR. It is for state to return a small, defined share of its savings to those who run the rails.
Government has bridged gap with incentive. But bridge is being dismantled even as traffic multiplies — outlay projected to fall to about Rs 437 crore from about Rs 3,631 crore two years ago. Gap is real. But MDR is wrong way to close it, because savings UPI creates accrue not to merchant we would tax, but to state and banks.
Look at state first, and conservatively. Reserve Bank spends some Rs 5,000-6,400 crore a year merely printing currency notes — more than government spends keeping UPI free — before cost of storing and moving cash is even counted. Then look at banks, largest beneficiaries. A bank must serve its customer somehow, and channels differ hugely in cost: counter transaction costs Rs 40-50, ATM withdrawal Rs 19 in interchange alone, while UPI transaction is small fraction of either. And by making account as usable as cash, UPI keeps money in accounts rather than idle in pockets — low-cost float on which banks earn their spread and lend.
If digitisation saves state and banks such sums, answer is not to claw money from merchants and consumers through MDR. It is for state to return small, defined share of its savings to those who run rails — to those who run the rails. This is not grudging subsidy but payment for value delivered, as state pays transmission company to carry electricity. Transparent, formula-based support funded from savings in currency management, never price tag before citizen.
An MDR would also be self-defeating. India is intensely price-sensitive — if paying digitally costs even a rupee more than cash, many will return to cash. A merchant charged MDR passes it on as "2 per cent extra for digital", or refuses digital altogether. Even 0.3% on merchant payments would take some Rs 27,000 crore a year out of thin-margin retail economy. To tell hundred crore users what was always free now costs money is surest way to slow, even reverse, transition still forming: We would collect little and lose a great deal. And fining charge to large merchants offers no lasting protection — thresholds slip, definitions widen.
India has done what no other country has managed — made real-time digital payment free, instant and universal, pulling hundreds of millions into formal economy. This rests on simple bargain — paying digitally will never cost more than cash. Keep UPI free, fund it from savings it visibly creates, and it will repay country many times over. That, not MDR, is road to truly cashless India.