The Indian government is considering phasing out subsidies for low-value UPI transactions as the introduction of Merchant Discount Rate (MDR) on selected higher-value payments creates a new revenue stream for banks and payment companies.
The move would mark a shift from a largely subsidy-supported UPI model towards a more commercially sustainable payment ecosystem. People familiar with the matter told The Economic Times that the government could discontinue incentives as MDR revenue begins flowing through the system.
Why UPI Subsidies Are Being Reconsidered
The Centre has allocated ₹2,000 crore for UPI and RuPay incentives in FY27. However, no fresh subsidy has reportedly been paid for transactions carried out since April 2025.
Government incentive payments had already fallen from ₹3,631 crore in FY24 to ₹1,046 crore in FY25, according to the report.
The subsidy mechanism was introduced after MDR on UPI and RuPay debit-card transactions was reduced to zero in 2020, helping encourage merchants and consumers to adopt digital payments.
MDR Creates a New Revenue Model
From October 15, 2026, a 0.4% MDR will apply to specified merchant UPI transactions above ₹2,000, subject to exemptions and caps.
The government has clarified that consumers will not pay transaction charges for UPI payments. Person-to-person transfers will remain free, while payments to merchants below ₹2,000 and transactions covered by exemptions will also remain free.
The government says around 96% of merchant transactions will remain unaffected by the new framework.
Shift Towards a Self-Sustaining UPI Ecosystem
The potential withdrawal of subsidies reflects a broader policy objective: making UPI financially sustainable as transaction volumes continue to expand.
UPI processed 24.51 billion transactions worth nearly ₹29.82 lakh crore in August 2026, highlighting the scale of the payment network.
The new model could reduce the payment ecosystem’s dependence on taxpayer-funded incentives while giving banks and payment companies a transaction-linked source of revenue.
For consumers, the immediate impact is expected to remain limited because the new MDR is structured primarily around specified merchant transactions rather than direct charges on UPI users.
