India Made UPI Free. Now It Has to Pay for It.

“The costs have to be paid by someone.” — Sanjay Malhotra, RBI Governor

A new law now lets the government decide when UPI stops being free, and the reaction online has been close to panic. But it turns out this is not the first time India has charged a fee for its most popular way to pay.
Economy & Policy
Author

Satvik Raman

Published

August 9, 2026

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Introduction

Some UPI users have already made up their minds. Ask around online this month, and you will find people saying they will stop using UPI altogether if it ever starts charging them, even a tiny amount. The panic is not hypothetical anymore. Parliament recently passed a bill letting the government decide which digital payments can stay free and which ones can start carrying a charge, ending the blanket rule that has kept UPI at zero cost for six years.

The government has already clarified that ordinary citizens will not pay to use UPI. What might change is a small fee on certain merchant transactions, and only above a certain size. Even that possibility has drawn comparisons to price hikes that killed other free habits, like wallet recharges that people quietly abandoned once platforms started charging for them.

Here is the strange part. Wherever a small fee has actually been added to instant payments, whether in another country or in India’s own past, adoption did not collapse. It went up. So why does the idea of any charge on UPI feel like such a threat?

Someone Was Always Paying For UPI

To understand why a fee is even being discussed, it helps to know who was paying for UPI all along. Every time you send money instantly, banks on both ends do real work behind the scenes. They move funds, screen for fraud, and keep servers running at all hours. That work costs money, and with card payments, banks recover it through a fee called the Merchant Discount Rate, paid by the merchant on every transaction.

UPI never worked that way. In 2020, the government banned banks from charging MDR on UPI, largely because a tax law change had just forced every business earning over ₹50 crore to offer a digital payment option. Merchants who felt pushed into digital payments could have resisted a new fee attached to it, so the government kept UPI at zero cost and introduced an annual subsidy to cover the banks’ costs instead, funded by taxpayers.

That subsidy did not keep pace. It peaked at around ₹3,631 crore in FY24, fell to ₹1,441 crore in FY25, and was budgeted at just ₹435 crore for FY26 before being revised upward mid-year because it was not covering costs. Meanwhile, UPI processed over 24,000 crore transactions worth ₹314 lakh crore in FY26 alone, up roughly 30% in volume and 21% in value from the year before. A parliamentary committee found that between 2022 and 2025, the subsidy covered barely 11% of what banks and fintechs actually spent keeping UPI running. Somebody was quietly footing that bill the whole time. It just was not the person tapping their phone at checkout.

Why a Tiny Fee Feels Bigger Than It Is

This is where the new law comes in. It lets the government decide, transaction by transaction, whether a charge applies, instead of keeping every UPI payment at zero by default. Analysts at Jefferies estimate that even a modest fee of 0.15 to 0.3%, applied only to merchant transactions above ₹2,000, could raise ₹5,000 to 10,000 crore a year by FY28.

That number looks small next to what people already pay elsewhere. Credit and debit cards routinely carry fees of 2 to 3%, several times higher than anything being discussed for UPI. Brazil ran a comparable experiment with its own instant payment system, Pix, launched in November 2020, and never hid the fee from day one. Sending money between friends stayed free, but a business receiving a payment could be charged from the very start. Fifteen months after launch, Pix had already overtaken debit and credit cards combined in transaction volume, and within a couple of years, more than 140 million Brazilians, roughly eight in ten adults, were using it, making over 4 billion transactions a month.

Pix worked partly because it never had to compete against a memory of being free. Merchants budgeted for its fee the same way they had always budgeted for card fees, just smaller. India’s own history makes a similar point from a different angle. Between UPI’s launch in 2016 and the 2020 ban on MDR, merchants paid a fee of roughly 0.25 to 0.3% on every UPI transaction. Despite that fee, UPI overtook debit and credit cards in both volume and value by 2019. The charge never stopped it from becoming the country’s dominant way to pay.

Final Thoughts

So the fear driving today’s panic is not really about whether a fee this small can be afforded. India already carried a similar fee for four years, and the habit grew anyway. What changed is that somewhere between 2020 and now, zero stopped being a price and started being a promise. Once people expect something to cost nothing, taking away even a fraction of a rupee feels like a loss, no matter how small the actual number is.

That is the real problem facing whoever decides how this new law gets used. Brazil never had to unteach a promise, because it never made one. India spent six years training an entire country of merchants and shoppers to expect zero, and now has to walk that back without the story turning into one about betrayal instead of upkeep. The economics of a small fee were worked out years ago, in Brazil and inside India’s own history. What remains unsolved is how to charge for something people were told, even quietly, would always be free.