Free for users, costly to run: The economics behind India's UPI system

For a customer scanning a QR code or a merchant receiving money, the Unified Payments Interface (UPI) appears free. This distinction has helped UPI become the backbone of India’s retail payments system. In July 2026 alone, UPI processed 23.66 billion transactions worth ₹29.88 trillion across 741 live banks, according to National Payments Corporation of India (NPCI) data.

But the absence of a visible transaction fee does not make the payment infrastructure itself costless.

Every UPI transaction requires payment infrastructure to process, authenticate and settle the transfer, while banks, payment service providers (PSPs), app providers and the NPCI incur costs in maintaining systems, managing fraud and security risks, and supporting customers.

This begs a question: How is UPI kept free when the payment infrastructure supporting it is not? And whether keeping UPI free is sustainable or not?

Two recent developments have triggered these questions. First, Parliament passed the Taxation and Other Laws (Amendment) Bill, 2026, which allows the central government to notify the electronic payment modes that will receive statutory protection from charges. Second, the Department of Financial Services (DFS) told a parliamentary panel that it is examining two options to ease the financial costs involving UPI: restoring merchant discount rate (MDR) for certain high-value transactions or merchants, or introducing a tiered incentive structure under which government support is phased out over the coming years.

MDR is the fee a merchant pays to payment providers for processing a digital transaction. The government is yet to finalise any new MDR framework.

Why UPI payments were kept free

UPI and RuPay debit card transactions have operated under a zero-MDR framework since January 2020. Under this model, neither the person making the payment nor the merchant receiving it pays the conventional MDR that is used in other payment systems, such as credit or debit cards, to compensate participants in the transaction chain.

The government adopted the zero-MDR framework to encourage widespread adoption of digital payments, particularly among small merchants, while supporting financial inclusion and reducing reliance on cash.

However, UPI is free at the point of use, not free to run. In its 2022 discussion paper on payment charges, the Reserve Bank of India (RBI) stated that payment service providers (PSPs) need income to support continued operations and investment in new technologies, systems and processes. It also noted that settlement among participant banks takes place on a deferred net basis, requiring systems to manage settlement risk and adding to costs.

The paper estimated that processing a person-to-merchant (P2M) UPI transaction with an average value of about ₹800 cost around ₹2 at the time.

How much the government pays to keep UPI payments free

So far, the government has largely supported the free UPI payment ecosystem through incentive schemes designed to compensate parts of the payment ecosystem while retaining zero MDR.

According to data by the Department of Financial Services, the government provided cumulative budgetary support of ₹8,276 crore between FY2021-22 and FY2024-25 under incentive schemes. The first three years were covered under the Incentive Scheme for Promotion of RuPay Debit Cards and Low-Value BHIM-UPI Transactions (P2M) scheme. The year-wise disbursement was ₹1,389 crore in FY2021-22, ₹2,210 crore in FY2022-23, and ₹3,631 crore in FY2023-24.

In March 2025, the Union Cabinet approved the Incentive Scheme for Promotion of Low-Value BHIM-UPI Transactions (P2M). This revised scheme dropped the RuPay debit cards and the UPI subsidy was narrowed to low-value transactions received by small merchants. The disbursement stood at ₹1,046 crore in FY2024-25.

Under the scheme, only UPI P2M transactions of up to ₹2,000 at small merchants qualified, at an incentive rate of 0.15 per cent. For example, if a customer paid ₹1,000 to a small merchant, the transaction could generate a government incentive of ₹1.50. If the same customer paid that merchant ₹3,000, there was no government incentive. Likewise, even a ₹1,000 UPI payment to a large merchant received no incentive. Yet all three transactions remained zero-MDR.

When the government does not pay for free UPI, who does?

Zero MDR does not mean the government reimburses the cost of every UPI payment. The government pays the incentive initially to the acquiring bank, or the merchant’s bank. The amount is then shared with other eligible participants, including the issuer bank, payment service provider bank and third-party app providers.

That creates three broad sources from which the system’s costs can ultimately be financed:

The first is explicit Budget support through government incentive schemes.

The second is expenditure absorbed by banks, PSPs and other participants. The RBI’s framework makes clear that operating payment infrastructure involves both fixed and recurring costs even when the transaction charge to the user is zero.

The third is indirect monetisation. Payment companies can use their merchant and customer relationships to build revenue-generating businesses around payments, including lending, merchant services, devices, advertising and distribution of other financial products. The payment itself can therefore remain free even when the customer or merchant relationship has commercial value.

But cross-subsidisation does not necessarily mean that revenues from these businesses fully compensate every participant for the cost of processing UPI.

This is where the industry’s sustainability argument has emerged. A parliamentary committee report cited an industry estimate of ₹20,700 crore as the operational cost of the UPI ecosystem, against the government’s ₹2,000 crore incentive allocation. The committee said the present incentive covered around 11 per cent of the industry’s estimated costs.

The sustainability question

The government has said the everyday UPI transactions will remain free for consumers. The question that emerges here is who should finance the infrastructure behind those payments.

According to Ajay Srivastava, founder of Global Trade Research Initiative, charging for UPI and pushing transactions back towards cash would be a false economy.

“Someone must pay—but it need not be Indian merchants or consumers,” he said in a LinkedIn post.

Srivastava said that while UPI costs money to operate, it should be treated as a national infrastructure like roads, courts and currency, and not merely a commercial service.

“India can afford free UPI. Keeping UPI free reportedly costs only ₹2,000–2,500 crore annually. This supports a system serving about 491 million people and 65 million merchants and processing transactions worth hundreds of lakh crore rupees. Compare this with annual subsidies of about ₹2.03 lakh crore for food, ₹1.68 lakh crore for fertilisers, ₹22,800 crore for agricultural credit support and ₹12,500 crore for petroleum and LPG,” he said.

According to him, returning to cash would cost far more. “Even a small MDR could persuade price-sensitive merchants to demand cash. Cash only appears free: notes must be printed, transported, guarded, counted and replaced. Banks need cash counters, vaults and ATMs, while businesses bear handling and security costs,” he said.

“MDR may generate visible revenue, but a return to cash would impose much larger hidden costs. The government may save more by keeping UPI free than it would earn from transaction charges,” he added.

If anyone besides the government should pay for free UPI, Srivastava believes it should be dominant platforms operating UPI in India.

“Google Pay and Walmart-owned PhonePe together process more than 80% of UPI transactions. These foreign-controlled platforms derive enormous commercial value from infrastructure funded by India. They can pay substantial annual participation fees without burdening ordinary users,” he said.

Keeping UPI free for consumers does not require its infrastructure to operate without revenue. It requires a decision on who finances that infrastructure: taxpayers, merchants, banks and payment companies, dominant applications, or some combination of them.

The debate over MDR is therefore only one part of the issue. The more fundamental question is how India wants to fund a payment system that increasingly resembles essential financial infrastructure, and how much of that cost should remain a public subsidy as UPI grows.

supply hyperlink