Will UPI Stay Free? The Reported Subsidy Hike Demand Ahead Of Budget 2026 Explained

Payment system operators are reportedly planning to seek a substantial increase in government subsidies for merchant discount rates (MDR) on Unified Payments Interface (UPI) transactions during the upcoming Union budget consultations. 

The industry says that the current funding is far too low to maintain the zero-MDR policy for low-value UPI payments, according to an Economic Times report. MDR is the fee merchants pay to banks or payment providers for processing online transactions. 

For this financial year, the government has allocated Rs 427 crore for digital payment incentives. This marks a huge gap compared to the estimated Rs 5,000–6,000 crore spent annually on covering UPI transactions below Rs 2,000.

According to the report, the industry representatives also plan to seek permission to impose an MDR of 25–30 basis points on low-value UPI payments at large merchants with annual turnover above Rs 10 crore. A basis point is a hundredth of a percentage point.

A senior executive at a major payments system operator told ET that funding for low-value UPI transactions needs over Rs 6,000 crore, far above the allocated amount of Rs 427 crore.

 "We will also propose MDR on high-value merchant transactions,” the executive said. 

Government allocations for digital payment incentives grew from Rs 1,500 crore in 2021-22 to Rs 3,500 crore in 2023-24, before falling to Rs 2,000 crore in 2024-25. For 2025-26, the budget estimates show a sharp drop to Rs 427 crore, despite record-high UPI transactions.

Since 2020, the government has mandated zero MDR on low-value UPI transactions, but each low-value merchant transaction costs about Rs 2, the ET report added, citing Reserve Bank of India's discussions. Currently, this cost is absorbed entirely by banks and fintechs. Payment operators argue that this model is unsustainable given UPI’s massive growth.

UPI payments account for about 85% of all digital transactions by volume in India. In October, UPI recorded an all-time high of Rs 27.28 lakh crore in transaction value. The average daily load during the month was worth nearly Rs 88,000 crore, the report added. According to National Payments Corporation of India (NCPI), the umbrella organisation that facilitates UPI payments, the total transactions stood at 2,070 crore in October.