India’s national highway story captures how large public infrastructure comes into its own. The National Highways, expanded and maintained through toll collection, did not merely connect cities. They transformed how trade moved, how businesses reached new markets, and how a fragmented economy became a single connected one, because the toll collected ensured the roads stayed safe and well maintained. While the national highways represent an infrastructure-led way of connecting India, the last decade has seen a different kind of connective tissue emerge in India, that is, fintech. Online payments through Unified Payments Interface ("UPI"), have not only made everyday transactions cashless, faster, cheaper and more accessible, but have also been instrumental in drawing India’s vast unorganised sector into a common, formal fold.
The success of UPI is owed to a simple fact: payments run on convenience, and convenience unifies the economy. Credit and debit cards illustrate the point well: they carry a charge well above 1%, and yet they are significantly utilised for their efficiency and frictionless checkout. Cash, in fact, has never been truly free; it simply hides its costs, as the neighbourhood vegetable vendor accepting only cash stays invisible to the tax net. UPI has managed to streamline real-time bank transfers just as credit cards had streamlined payments at the checkout counter, while also pulling unorganised sector’s transactions onto the books as traceable, legitimate income.
Having become the backbone of India’s daily commerce, UPI is now poised for its next big leap: from a free payments platform supported by government subsidy, to a self-sustaining system built to further expand digital payments. Recently, the central government notified a Merchant Discount Rate ("MDR") of 0.4% on UPI person-to-merchant transactions above INR 2,000, effective from 15 October 2026, a modest charge for a system that is reshaping how millions of people transact.
This charge, notably, is selective. Ordinary person-to-person UPI transfers remain entirely free, no matter the amount. The charge applies only to merchant payments above INR 2,000. Thin-margin sectors such as railways, telecom, insurance, fuel, and agricultural inputs, get a flat charge of INR 5 per transaction and capital market transactions get their own bracket at 0.02% per transaction, capped at INR 300.
The government has also clarified that the MDR is not a tax and does not go to the government at all. It is meant to be distributed among banks, payment app providers and other participants who keep the digital payments ecosystem running covering costs of infrastructure maintenance. Brazil has already walked this exact road with its payments platform called PIX, which has carried a merchant fee since its launch in 2020, and their digital payments system has thrived on it.
One of the concerns raised for levying such a charge on UPI is that a merchant facing 0.4% on a transaction will not absorb it quietly, and may either nudge a customer towards cash payments or fold the cost into the price instead. In that case, it is worth asking the larger financial impact of such a charge. A self-funding UPI system would reduce the government’s subsidy burden to banks for processing UPI payments, which in turn would free up fiscal resources for other developmental avenues. There is also a second, quieter fiscal gain as well: a merchant who increases price of goods to retain slightly more revenue per transaction, would also retain more taxable income and turnover on record, in principle translating into a higher tax base.
While the monetary benefits of this charge to the economy may take years to fully materialise, its legal challenge has arrived in a matter of days. A PIL has been filed challenging the amended Section 10A of the Payment and Settlement Systems Act, 2007, the provision that removed UPI’s blanket no-charge protection, sparing only RuPay debit cards. [Anjan Datta v. Union of India, Diary No. 57387/2026]. The petitioner, amongst other things, seeks a declaration of unconstitutionality or a reconsideration of the decision to levy MDR mandating, transparent, time-bound public consultative process before levying MDR.
The merit of such a petition is questionable because Indian courts have long treated economic and fiscal legislation with considerable deference, on the reasoning that the legislature, with the wherewithal of country’s economic data, must be allowed room to experiment and correct course with economic policy. The foregoing logic has made courts reluctant to strike down such measures merely for being imperfect or under inclusive. A charge on UPI based payments to merchants or an INR 2,000 threshold, or a carve-out for RuPay debit cards, may ordinarily be read as the kind of line-drawing that falls within permissible legislative economic discretion, and not a violation of rights.
A self-funding, well-maintained highway serves its traffic better in the long run than a free one that nobody can afford to repair. UPI’s free ride was always a subsidy in disguise, generously funded to build habit and scale. What we are watching now is UPI hitting its first real speed bump: being asked, for the first time, to pay its own way. Given how modest the charge is, how deliberately it has been targeted away from small merchants and everyday users, and how comparable systems elsewhere have absorbed similar fees without losing momentum, there is good reason to expect that this transition will hold, and that UPI will come out of it sturdier.
Nakul Dewan is a Senior Advocate and King’s Counsel.