Digital public infrastructure produces benefits spread across the economy but costs that sit with a few institutions. How should India finance the sustainability of UPI?

UPI is run by NPCI and is India's flagship piece of digital public infrastructure (DPI). Since January 2020, zero MDR (merchant discount rate) has kept UPI free for merchants. This rests on Section 10A of the PSS Act, 2007, and Section 269SU of the Income-tax Act [1]. From 15 October 2026, a 0.4% MDR applies to P2M payments above ₹2,000 [2]. That change shows India needs a blended financing model.

Benefits spread out, costs concentrated

• Spread-out gains: less cash handling, faster reconciliation, credit based on traders' cash flows, and a wider tax base. None of these show up in UPI's own accounts.
• Concentrated costs: banks and payment apps pay for servers, cybersecurity and fraud control. The MDR is shared among them. It is not a tax for the Government or NPCI [3].
• Partial subsidy: the ₹1,500 crore incentive scheme pays only for small-merchant payments up to ₹2,000, at 0.15% [1]. Firms short of money cut invisible spending such as fraud checks first.

How India should finance UPI

• Charge those who can pay: put the MDR on large, formal merchants. P2P and about 96% of merchant payments stay free [3].
• Graded pricing, not one sharp cut-off: RBI's 2022 Discussion Paper suggested charges that rise by amount band [4]. The 2026 rules already cap MDR at ₹300 and charge a flat ₹5 in low-margin sectors like fuel and railways [2]. Smoother bands would stop merchants splitting bills to stay under ₹2,000.
• Targeted Budget support: keep incentives for small and rural merchants, whose digital records matter most for credit. Rural small-merchant QR payments remain free [2].
• Subsidy linked to performance: tie payouts to system uptime and low technical failure rates, as the 2025 scheme did [1].
• Phase-out timetable: publish a multi-year plan so banks can budget for security instead of waiting on each annual Budget.
• Data-driven review: NPCI and RBI should publish data on payments bunching just below ₹2,000 and on any shift back to cash.

Keeping UPI entirely free leaves it underfunded, and running it purely for profit would push out small traders. A mix works better: modest graded charges on those able to pay, targeted public support for small and rural merchants, and regular review based on published data. This keeps UPI secure and open to all, in line with SDG 8.10 on universal financial access.