Govt. to hold talks with banks and decide subsidy amount for UPI after charges kick in

1. At a Glance

• UPI (Unified Payments Interface) has run with zero Merchant Discount Rate (MDR) since January 2020. The government has funded that through an incentive subsidy to banks. [2]
• Per The Hindu (26 Sept 2026), MDR on UPI is set to go live on 15 October, and the Finance Ministry says there is no proposal to delay it. [1]
• The Finance Ministry says MDR collections will not cover the full cost of running UPI. It will talk to the Indian Banks' Association (IBA) on how much of the subsidy continues and in what form. [1]
• Aspirants should care because this sits at the intersection of digital public infrastructure, fiscal subsidy design, financial inclusion and payments regulation.
• Caveat: the article excerpt is truncated after "Issue for G…", so later details are not covered.

2. Why in the News

• The Finance Ministry told The Hindu that it will hold talks with the IBA on the quantum and form of the ongoing subsidy once MDR starts. [1]
• It will also coordinate with the IBA to stop merchants passing MDR on to customers. [1]
• It plans to speak to traders and the Confederation of All India Traders (CAIT). The message is that most merchants will not be affected and should not stop accepting UPI. [1]
• The government has budgeted ₹2,000 crore for the current financial year under the incentive scheme for RuPay debit cards and low-value BHIM-UPI (P2M) transactions. [1]
• In 2026, the Department of Financial Services (DFS) released a report titled "Socio-Economic Impact Analysis of Incentive Scheme for Promotion of RuPay Debit Card and low-value BHIM-UPI Transactions (P2M)" at Chintan Shivir 2026. Only the title was retrieved. [5]

3. Background & Evolution

• January 2020: MDR was made zero for RuPay debit card and BHIM-UPI transactions. This was done by amending Section 10A of the Payment and Settlement Systems Act, 2007 and Section 269SU of the Income-tax Act, 1961. [2]
• April 2022: the Cabinet approved an incentive scheme for RuPay debit cards and low-value BHIM-UPI (P2M) transactions for one year, from April 2022. [2]
• The scheme was renewed in later years. The FY 2024-25 outlay was ₹1,500 crore, for 1.4.2024 to 31.3.2025. [3][6]
• Total digital payment transactions grew from 8,839 crore (FY22) to 18,737 crore (FY24), a 46% CAGR. UPI grew at a 69% CAGR. [4]
• FY 2026-27 budget provision: ₹2,000 crore. [1]

4. Core Static Facts

Item	Fact
Subsidy scheme	Incentive scheme for promotion of RuPay Debit Cards and low-value BHIM-UPI (P2M) transactions [2]
Approving body	Union Cabinet [2]
Nodal department	DFS, Ministry of Finance [5]
Zero-MDR legal basis	Sec 10A, PSS Act 2007; Sec 269SU, Income-tax Act 1961 [2]
Small-merchant incentive	0.15% of transaction value on UPI transactions up to ₹2,000; zero MDR above ₹2,000 but no incentive [3]
Large merchants	Zero MDR, no incentive [3]
FY25 outlay	₹1,500 crore [3][6]
Current-year budget	₹2,000 crore [1]
Planned MDR start	15 October (2026) [1]
Bank counterpart	Indian Banks' Association (IBA) [1]

5. Multi-Dimensional Analysis

Economic

• Ecosystem costs are borne by banks and payment service providers. The subsidy compensates them, and MDR shifts part of that cost to merchants. [1][2]
• The scale of digital payments (46% CAGR) raises the fiscal cost of a permanent subsidy. [4]

Social / Inclusion

• The incentive was aimed at small merchants. Passing MDR on to customers could reverse the adoption gains among low-income users. [1][3]
• The government's stated concern is that small traders do not stop accepting UPI. [1]

Legal / Constitutional

• The zero-MDR mandate is statutory (Sec 10A PSS Act; Sec 269SU IT Act), so the shift to MDR raises the question of what legal or regulatory change is required. The excerpt does not say. [2]

Governance / Administrative

• The Ministry is coordinating with the IBA, CAIT and merchants. Enforcing "no pass-through" to customers is a practical bottleneck. [1]

6. Recent Developments (last 12-18 months)

• FY 2024-25: ₹1,500 crore incentive scheme approved. [3]
• 2026 (Chintan Shivir): DFS released a socio-economic impact report on the scheme. [5]
• 25-26 Sept 2026: the Finance Ministry confirmed the 15 October MDR go-live and planned IBA talks. [1]

7. Prelims Hooks

• Zero MDR for RuPay debit and BHIM-UPI took effect in January 2020. [2]
• The amended provisions are Sec 10A of the PSS Act, 2007 and Sec 269SU of the Income-tax Act, 1961. [2]
• The incentive scheme was first approved for one year from April 2022. [2]
• The scheme covers person-to-merchant (P2M) transactions only. [2]
• FY25 outlay was ₹1,500 crore. [3]
• The small-merchant incentive is 0.15% for transactions up to ₹2,000. [3]
• Large merchants get no incentive. [3]
• Digital payments rose from 8,839 crore to 18,737 crore transactions between FY22 and FY24. [4]
• UPI's CAGR over that period was 69%. [4]
• The nodal department is DFS, Ministry of Finance. [5]
• The FY 2026-27 budget for the scheme is ₹2,000 crore. [1]
• The MDR go-live date is 15 October. [1]

8. Why the Subsidy Was Never Full Payment for Banks

• The incentive only ever paid for the smallest slice of UPI
• Banks got 0.15% of the transaction value, and only on UPI payments up to ₹2,000 made to small merchants [3].
• Above ₹2,000, and for all large merchants, the bank got zero MDR and zero incentive — it did the work for nothing [3].

• So every year that high-value UPI grew, a bigger share of the system ran on money nobody paid for.

• The money per transaction has been falling, not rising

• Total digital payment transactions went from 8,839 crore (FY22) to 18,737 crore (FY24), with UPI growing at a 69% CAGR (compound annual growth rate — the average yearly growth) [4].
• But the outlay was ₹1,500 crore in FY25 and ₹2,000 crore now [1][3]. Volumes multiplied far faster than the pot.

• This is why the Finance Ministry now admits MDR itself will not cover the full cost of running UPI [1]. The gap did not appear in October 2026; it has been widening for years.

• A one-year Cabinet approval is a bad base for building infrastructure

• The scheme was first cleared for just one year from April 2022, then renewed year by year [2].
• A bank deciding whether to add servers, fraud checks and helplines for UPI cannot know if the payment exists next April.
• That uncertainty pushes banks to under-invest in the boring parts — failed-transaction handling and complaint redress — because those cost money and earn nothing.

9. RBI Asked This Same Question Back in August 2022

• The regulator put UPI charges up for public debate four years ago
• On 17 August 2022 RBI released a Discussion Paper on Charges in Payment Systems, covering charges across IMPS, NEFT, RTGS and UPI, and invited public feedback till 3 October 2022 [7].
• The government's public position after that was that UPI would stay free, and zero MDR continued [2].

• So the 15 October switch is not a new idea [1]. It is RBI's 2022 question finally being answered — in the opposite direction from what was said then.

• Why this matters for an answer, not just for trivia

• It shows the policy was settled by the government's fiscal choice, not by the regulator's cost study.
• Zero MDR sits in law — Section 10A of the Payment and Settlement Systems Act, 2007 and Section 269SU of the Income-tax Act, 1961 [2]. A statute is much harder to reverse than an RBI circular.
• An aspirant should use this as an example of policy by statute versus policy by regulator: freezing a price in an Act removed RBI's normal power to adjust that price as costs changed.

10. Why Telling Merchants Not to Charge Customers May Not Hold

• The law binds banks, not shopkeepers
• Section 10A of the PSS Act stops a bank or system provider from imposing a charge on the person making or receiving a payment [2].
• A kirana shop is neither a bank nor a system provider. Nothing in that section speaks to what the shop does at its own counter.

• So the Ministry's plan to work through the IBA and talk to CAIT is persuasion, not enforcement [1]. Banks can be instructed; 5-crore-plus merchants cannot be instructed the same way.

• Pass-through does not have to look like a fee

• A merchant can simply quote a lower price for cash, or round the UPI price up. No surcharge line appears anywhere.
• Nothing in a UPI QR payment shows the customer what the merchant was charged, so there is no record to complain about.

• The only real lever is the contract between the merchant and its acquiring bank (the bank that signed up the merchant and collects MDR from it). That makes the acquiring bank the enforcer — and the acquiring bank earns more when the merchant stays on UPI, not when it is penalised.

• The legal starting point for MDR itself is unsettled

• Section 10A's words cover a person receiving a payment. A merchant receiving money through UPI is arguably such a person.
• If so, MDR cannot simply be switched on; Section 10A and the Section 269SU notification need changing first. The news excerpt does not say what legal step is planned [1].
• Watch for this: whether the 15 October start comes with an amendment or a notification is the single most testable detail of this story.

11. The Case Against Charging At All — And What It Gets Right

• The strongest argument on the other side
• UPI is digital public infrastructure — a public road, not a shop. We do not ask road users to pay the builder's full cost every trip.
• The cost to the state is small. ₹2,000 crore this year carries a system doing over 18,737 crore digital transactions a year [1][4].

• Adoption by small traders was the whole point of the scheme, which paid out only on small-merchant, low-value P2M transactions [3]. A fee at the counter is exactly the thing likely to push a vegetable seller back to cash.

• What that argument gets right — and where it stops

• It is right that the fiscal cost is modest and that the gains are real; DFS itself commissioned a socio-economic impact study of the scheme, released at Chintan Shivir 2026 [5].
• But it treats zero MDR as free when it is not. The cost simply moved to banks and payment service providers, who were compensated only in part [1][3].
• And a subsidy that does not grow with volume is already a quiet, unannounced charge on banks. The honest choice is not "free versus paid" — it is who is told they are paying.

12. What Brazil's Pix Priced Differently

• Brazil built the same kind of system but never set the merchant price at zero
• Pix, launched by the Central Bank of Brazil in November 2020, is free for individuals but charges firms about 0.33% of the transaction [8].
• That is far below Brazil's debit cards (1.13%) and credit cards (2.34%) [8]. Low, but not nothing.

• Because many small Brazilian firms take payments in the owner's personal account, the smallest sellers pay near zero anyway [8] — targeting by account type, not by a yearly government cheque.

• The lesson India can take

• A small, permanent, openly stated merchant fee is easier to live with than a zero price that is suddenly switched on.
• The Brazilian central bank runs the infrastructure itself, which kept large technology firms from taking fees out of the system [8]. India's UPI money flows instead through private apps, while the subsidy is paid to banks [1].
• So the fair comparison question in a Mains answer is not should UPI charge but should the charge have been small and permanent from the start.

13. What DFS, RBI and NPCI Should Settle Before the Switch

• DFS should state the subsidy as a formula, not a yearly number
• Right now the amount is a budget line decided each year — ₹1,500 crore, then ₹2,000 crore [1][3].

• A fixed rate per small-merchant transaction, carried for a stated number of years, lets banks plan. Brazil's Pix has kept one published merchant price since 2020 [8].

• RBI should publish the cost numbers before the price changes

• RBI already collected public views on payment charges in its August 2022 discussion paper [7], but the actual cost per UPI transaction has not been put in front of the public.

• Without that number, no one can check the Ministry's claim that MDR will not cover the full cost [1]. Publish the cost, then argue about the fee.

• The legal fix must come before 15 October, not after

• Section 10A of the PSS Act and Section 269SU of the Income-tax Act are the sections that made MDR zero [2]. They are what must be amended or renotified.

• Starting collection first and fixing the law later would leave every rupee of MDR open to challenge.

• Acquiring banks should carry the anti-surcharge duty in the merchant contract

• The Ministry wants no pass-through to customers and is working through the IBA [1].
• The workable version: make "no extra charge for paying by UPI" a condition in the merchant's agreement with its acquiring bank, with the merchant's QR de-registered on repeat breach. That gives the ban a person who can actually act on it.

14. Anchors for Answers

• Data: Digital payment transactions rose from 8,839 crore (FY22) to 18,737 crore (FY24), 46% CAGR; UPI alone 69% CAGR [4]
• Data: ₹2,000 crore budgeted this year for the RuPay debit card and low-value BHIM-UPI (P2M) incentive scheme, against ₹1,500 crore in FY25 [1][3]
• Data: Pix costs Brazilian firms about 0.33% per transaction, versus 1.13% for debit cards and 2.34% for credit cards [8]
• Report/Committee: RBI, Discussion Paper on Charges in Payment Systems, 17 August 2022 — covered IMPS, NEFT, RTGS and UPI, public feedback till 3 October 2022 [7]
• Report/Committee: DFS, Socio-Economic Impact Analysis of the Incentive Scheme for RuPay Debit Card and low-value BHIM-UPI (P2M) transactions, Chintan Shivir 2026 [5]
• Law: Section 10A, Payment and Settlement Systems Act, 2007 (bars banks and system providers from charging the payer or payee) and Section 269SU, Income-tax Act, 1961 [2]
• Comparison: Brazil's Pix — central bank owns the infrastructure, free for individuals, a small published fee for firms, in place since November 2020 [8]
• Scheme: Incentive scheme for RuPay Debit Cards and low-value BHIM-UPI (P2M) transactions — 0.15% paid to banks only on transactions up to ₹2,000, nothing above that or for large merchants [3]

15. Mains Relevance

• GS-III: Indian Economy (mobilisation of resources, inclusive growth, banking and financial inclusion), plus government budgeting and subsidies.
• GS-II: Governance (government policies and interventions, role of regulators).
• Possible questions:
• UPI's zero-MDR model is fiscally unsustainable. Discuss the case for and against introducing MDR.
• Examine the implications of subsidies for digital payments on financial inclusion and fiscal health.
• Who should bear the cost of digital public infrastructure: the state, banks, or users?

16. Related Topics to Study Next

• Payment and Settlement Systems Act, 2007: the statutory basis of RBI's regulation of payments.
• NPCI and RuPay: the operator of UPI and the domestic card network.
• Financial inclusion and digital public infrastructure: the reason for the zero-MDR design.
• Fiscal subsidies and budget classification: how the ₹2,000 crore line is accounted for.
• Interchange and MDR economics: how fees are split between issuer, acquirer and network.
• Income-tax Sec 269SU: the legal mandate to offer digital modes.
• Consumer protection in fintech: relevant to merchant surcharging.

17. Common Errors / Trap Areas

• MDR vs incentive: MDR is a merchant fee. The incentive is a government payment to banks, not to consumers. [1][3]
• Small vs large merchants: only small-merchant transactions up to ₹2,000 earned the 0.15% incentive. [3]
• Year mix-up: ₹1,500 crore is the FY25 outlay, while ₹2,000 crore is the current-year budget. [1][3]
• P2M vs P2P: the scheme covers only P2M. [2]
• Implementing body: DFS (Finance Ministry), not MeitY or NPCI. [5]