India Imposes a 0.4% Merchant Fee on UPI Payments Exceeding ₹2,000

India has introduced UPI payment changes to larger transactions made on its digital payments network. The move marks the end of free processing for merchants as authorities move to make the system sustainable. India suspended merchant fees on UPI payments in January 2020 in a bid to increase adoption. 

Since then, the government has subsidized the cost of processing some of the transactions made via the digital payments network for banks and payment firms. India introduces merchant fees at a time when the country is preparing a framework for UPI agentic payments. 

Who Will Pay the New UPI Charges?

According to the National Payments Corporation of India (NPCI), which runs the Unified Payments Interface (UPI), the fee applies to merchants, not consumers. India will impose a 0.4% merchant fee on specific payments above ₹2,000, roughly $21, starting October 15. 

For credit card payments, merchants will pay between 1.5% and 2.5% per transaction, while debit card transactions will attract a 0.9% charge. The NPCI capped UPI merchant fees at ₹300 (about $3) for transactions amounting to ₹75,000, which is roughly $783. 

Small scale traders who receive a maximum of up to ₹100,000, roughly $1,041 a month through the digital payments network will be exempted from UPI charges. Services such as railway, telecommunication, fuel, and insurance will attract a flat charge of ₹5 transactions that exceed ₹2,000. 

Why Does UPI Charges for Merchants Matter?

The payments industry in India has been waiting for the government to introduce UPI changes for several years now. Industry actors argued that the free model had made it challenging for them to meet the rising cost of operating the network. In August, New Delhi amended India’s payments rules to allow merchant fees on selected UPI transactions. 

A guidance issued on September 15 prohibited banks from applying UPI charges on transactions above ₹2000, paving the way for financial institutions to charge larger transactions. UPI has grown significantly in India. NPCI data shows that in August alone, over 24.51 billion transactions valued ₹29.9 trillion, roughly $312 billion, were processed through the digital payments network. 

Last month, Indian authorities said the cost of running the UPI system at this scale was making the free-model unsustainable. Industry estimates place the cost of running the network at about ₹200 billion, which translates to $2.1 billion annually. 

Impact of Merchant Fees on Businesses 

According to the NPCI, the new merchant charges will be shared among participants in the UPI ecosystem. The funds will also fund investments in areas such as payment infrastructure, cybersecurity, fraud detection, and customer support. However, this decision has sparked debate on whether merchant charges could weaken UPI’s main advantage, affordability. 

According to the NPCI, the 0.4% charge is low enough for businesses to cover. As such, merchants are not allowed to pass the fee on to customers. Although consumers will not face a direct charge, businesses that process high-value transactions will have to absorb additional costs that did not previously exist.