A UPI payment is a message relay. Your payment app sends an instruction through a bank to the National Payments Corporation of India (NPCI), whose central switch asks your bank to debit your account and the receiver’s bank to credit theirs. The whole round trip usually takes seconds. For six years, almost nobody paid a visible fee for this: the government made merchant fees zero in January 2020 and partly compensated banks from the budget. That is now changing. From 15 October 2026, merchants will be charged a fee on UPI payments above ₹2,000, while payments between people and smaller merchant payments stay free.
What UPI actually is
The Unified Payments Interface was launched by NPCI on 11 April 2016, under the regulatory oversight of the Reserve Bank of India (RBI), according to the Ministry of Finance. NPCI is the organisation that runs the system; the RBI regulates it.
UPI is not an app and not a bank. It is a shared set of rules and a central switch that lets any participating bank account send money to any other, through any participating app. That interoperability is why you can pay a shop that uses a different app from yours. It is also one of the building blocks of India’s wider digital public infrastructure, covered in our explainer on India Stack.
Two ideas make it simple to use:
- UPI ID (virtual payment address, or VPA): an address such as name@bank that stands in for your account number and IFSC code. The government describes it as letting any bank account connect with another without sharing detailed banking information.
- UPI PIN: the secret number that authorises a payment from your account. NPCI has added alternatives over time: UPI Lite allows small payments without a PIN, and since 2025 some apps let you approve payments with your phone’s fingerprint or face unlock, per a PIB factsheet.
Who is involved in a payment
The RBI’s discussion paper on payment charges lists the participants in UPI as the payer and payee payment service providers (PSPs), the remitter bank, the beneficiary bank, NPCI, the account holders, and third-party application providers (TPAPs).
| Participant | Who it is | What it does |
|---|---|---|
| Payer app (TPAP) | PhonePe, Google Pay, Paytm and others | The screen you use; it is not a bank and holds no money for UPI payments |
| PSP bank | A bank that sponsors the app on UPI | Connects the app to NPCI and is responsible for it on the network |
| NPCI UPI switch | Run by NPCI | Routes the request, checks the receiver, and tracks every transaction |
| Remitter bank | Your bank | Verifies the PIN and debits your account |
| Beneficiary bank | The receiver’s bank | Credits the receiver’s account |
| Acquiring bank or aggregator | The merchant’s payment provider | Signs up the merchant and, where fees apply, collects them |
A bank can play several of these roles at once. The government notes that each of the 703 banks live on UPI (as of March 2026) acts as a remitter PSP, a beneficiary PSP, or both, with NPCI monitoring their performance.
How a payment moves, step by step
Here is a simplified version of what happens when you scan a shop’s QR code.
- You start the payment. Your app reads the merchant’s UPI ID from the QR code and you enter the amount.
- The app sends the request. It passes the instruction, encrypted, to its PSP bank, which forwards it to NPCI’s UPI switch.
- NPCI routes it. The switch identifies which bank holds the receiver’s account and which holds yours.
- You authorise it. You enter your UPI PIN (or use an approved alternative). Your bank checks it.
- Your bank debits you. The remitter bank takes the money from your account and confirms to NPCI.
- The receiver’s bank credits the merchant. NPCI tells the beneficiary bank to credit the shop’s account, and it confirms.
- Everyone gets a confirmation. NPCI sends the result back along the chain; your app shows “successful” and the shop’s speaker announces the payment.
The customer and the shop see the money move instantly. Behind the scenes, banks settle what they owe each other later. The RBI paper notes that while UPI gives merchants real-time credit, settlement among the participating banks is on a deferred net basis: banks net out their obligations and settle in batches. Managing the risk in that gap is one of the costs of running the system.
Because the chain depends on you approving a payment, most UPI fraud works by tricking people into approving one. Our guide on how UPI frauds work explains the common methods.
P2P and P2M: two kinds of UPI payment
UPI carries two broad types of payment, and the difference now matters for fees.
- P2P (person to person): sending money to a friend, relative or landlord, or between your own accounts.
- P2M (person to merchant): paying a business, whether a tea stall’s QR code, an online checkout or a utility bill.
In FY2025-26, P2M payments made up 63% of UPI transactions by number, but P2P transfers accounted for 71% of the value, according to the Ministry of Finance. Merchant payments are many and small: 86% of P2M transactions were below ₹500.
There is also a middle category. NPCI’s P2PM (person-to-person-merchant) framework covers small vendors who receive payments into their own personal accounts. Under the new rules, a vendor in this category receiving up to ₹1 lakh a month through UPI QR codes pays no merchant fee. A merchant whose UPI receipts exceed ₹1 lakh a month for three consecutive months is moved to the regular P2M category, according to NPCI’s FAQs.
How big UPI has become
In September 2026, UPI processed 24.07 billion transactions (2,407 crore) worth ₹29.37 lakh crore, according to NPCI data reported by DD News. That was 23% more transactions and 18% more value than a year earlier. The daily average was about 802 million transactions. August 2026 had slightly more in total (24.51 billion), partly because it had one more day.
For the full year FY2025-26, UPI handled 24,161.69 crore transactions worth about ₹314 lakh crore, up from about 2 crore transactions in FY2016-17, the Ministry of Finance said in April 2026. It also said UPI accounted for 85% of India’s digital payments by volume in FY2025-26.
Who has been paying for it
Running UPI costs money: NPCI’s switch, bank servers, fraud monitoring, customer support and app development. Normally, card and payment networks recover these costs through the merchant discount rate, or MDR: a small percentage of each payment that the merchant’s bank deducts before passing the money on. Our explainer on what MDR is covers how that fee is split.
NPCI’s framework provides for an MDR of up to 0.30% on UPI merchant payments, the government noted in 2025. But from January 2020, the government made MDR zero for UPI and RuPay debit cards through amendments to section 10A of the Payment and Settlement Systems Act, 2007, and section 269SU of the Income-tax Act, 1961.
With no fee, the cost fell on three groups:
- Banks and payment apps absorbed most of it. NPCI’s FAQs say that, by industry estimates, running UPI’s operations, bandwidth, fraud prevention and bank technical support costs around ₹20,000 crore a year.
- The government paid a partial subsidy. Its incentive scheme for RuPay debit cards and low-value UPI merchant payments paid out ₹1,389 crore in FY2021-22, ₹2,210 crore in FY2022-23 and ₹3,631 crore in FY2023-24, according to the Cabinet decision of March 2025.
- Customers and merchants paid nothing directly for UPI payments from bank accounts.
How the government incentive works
The most recent scheme approved by the Cabinet, for FY2024-25, had an outlay of ₹1,500 crore. It paid 0.15% of the value of UPI P2M payments up to ₹2,000 made to small merchants. Large merchants and payments above ₹2,000 got no incentive. Only 80% of each quarter’s claim was paid unconditionally; 10% depended on the acquiring bank keeping technical declines below 0.75%, and 10% on keeping system uptime above 99.5%. The money goes to the merchant’s (acquiring) bank, which shares it with the customer’s bank, the PSP bank and the app provider, per the same release.
The amounts have been uneven. A PTI report in Business Standard says the budget estimate for FY2025-26 was ₹437 crore, later raised to a payout of about ₹2,196 crore, and that ₹2,000 crore has been allocated for FY2026-27. NPCI itself now describes the subsidy as “short-term bridge funding rather than a permanent measure”.
The wallet exception
One part of UPI has carried a fee since 2023. When you pay a merchant on UPI using money in a prepaid wallet (a PPI, or prepaid payment instrument) rather than a bank account, NPCI applies an interchange fee of 1.1% on payments above ₹2,000, paid to the wallet issuer. The rule took effect on 1 April 2023, and the wallet issuer in turn pays a 0.15% charge to the customer’s bank for wallet top-ups above ₹2,000, Business Standard reported. Customers are not charged.
The new MDR on large merchant payments
On 15 September 2026, NPCI and the Ministry of Finance announced a new framework. The Ministry says it was introduced under the Payment and Settlement Systems Act after deliberations by the UPI Steering Committee, and that the MDR is neither a tax nor a charge collected by the government or NPCI. It is scheduled to apply from 15 October 2026.
| Payment type | Merchant fee from 15 Oct 2026 |
|---|---|
| Any P2P transfer, any amount | None |
| P2M payment up to ₹2,000 | None |
| Small merchant (P2PM), up to ₹1 lakh a month via QR | None |
| UPI AutoPay mandates (bills, subscriptions, SIPs) | None |
| P2M payment above ₹2,000 | 0.4%, capped at ₹300 from ₹75,000 upwards |
| Railways, telecom, insurance, fuel, agricultural inputs, above ₹2,000 | Flat ₹5 per payment |
| Mutual funds, stockbrokers, securities | 0.02%, capped at ₹300 |
Sources: Ministry of Finance and NPCI FAQs. NPCI’s worked examples: a ₹3,000 payment costs the merchant ₹12, and a ₹50,000 payment costs ₹200.
Key rules for customers and merchants:
- Customers pay nothing. Banks have been told to make sure merchants do not pass the MDR on to customers, and UPI apps are prohibited from charging platform fees.
- Most payments are unaffected. The Ministry says about 96% of merchant transactions fall outside the fee because they are under ₹2,000 or made to small merchants.
- Money goes back into the system. The MDR is shared among banks, payment service providers and UPI app providers. Five percent of collections will go into a fund to expand UPI acceptance among small merchants.
- Credit on UPI follows its own rules. NPCI says RuPay credit cards and pre-sanctioned credit lines linked to UPI follow credit card guidelines, and the new MDR applies to account-to-account payments.
The RBI has publicly supported the change, calling it an important step towards the long-term sustainability of digital payments, The Tribune reported. Traders were less pleased. On 30 September 2026, a delegation led by the Confederation of All India Traders met Finance Minister Nirmala Sitharaman and asked for the fee to be deferred until after the festive season, for the ₹1 lakh small-merchant threshold to be raised to ₹5 lakh, and for merchant-to-merchant payments to be excluded, Business Today reported. They withdrew a planned “No UPI Day” protest after the meeting; the 15 October date had not been changed at that point.
How UPI apps make money
If basic payments have earned apps almost nothing, why do PhonePe and Google Pay compete so hard? Because the payment is the front door, not the business.
PhonePe’s draft IPO prospectus, as summarised by Finshots, describes revenue from merchant services (online payment gateway fees, and devices such as payment speakers), advertising, and commissions for distributing loans and insurance from banks and other lenders. Its consumer payments are close to zero-margin. PhonePe reported operating revenue of ₹7,920.5 crore and a loss of ₹2,792 crore in FY2025-26, with ₹1,907.1 crore spent on payment processing, according to Inc42’s reading of its financial statements.
The new MDR adds a direct revenue line for apps on larger merchant payments. NPCI argues this will help smaller fintechs compete, because under zero MDR “only well-capitalised tech conglomerates can afford to sustain long-term operational losses”.
The market share cap
That concentration is a long-running concern. In November 2020, NPCI said no single third-party app should handle more than 30% of UPI transaction volume. The deadline for existing apps to comply has been pushed back twice and now stands at 31 December 2026, Business Today reported when it was last extended.
The two largest apps remain well above that line. In August 2026, PhonePe handled 45.9% of UPI transactions by volume and Google Pay 32.4%, with Paytm third at 8.1%, according to Inc42’s calculations from NPCI data. Whether NPCI enforces the cap, extends it again or changes it is one of the open questions for UPI in 2027.
The point: UPI feels free because, for most payments, nobody at the till pays for it: banks, apps and a partial government subsidy have carried the cost since 2020. From 15 October 2026, merchants start paying a capped fee on payments above ₹2,000, while transfers between people and small everyday payments stay free. The plumbing is unchanged; what is changing is who funds it.
Sources
- Merchant Discount Rate (MDR) on Select UPI (P2M) Transactions: FAQs, NPCI, 15 September 2026
- UPI Continues to Remain Free for Peer to Peer Transactions and 96% of Merchant Transactions, Ministry of Finance via PIB, 15 September 2026
- UPI completes 10 glorious years, Ministry of Finance via PIB, 30 April 2026
- Cabinet approves Incentive scheme for promotion of low-value BHIM-UPI transactions (P2M), PIB, 19 March 2025
- UPI: Transforming India’s Payment Landscape, PIB factsheet
- From Queues to QR Codes: India’s Payment Revolution, PIB
- Discussion Paper on Charges in Payment Systems, Reserve Bank of India, August 2022
- UPI transactions surge 23% to 24.07 billion in September: NPCI, DD News (IANS), 1 October 2026
- UPI fee: Why government is putting a price on big merchant payments, Business Standard (PTI), 16 September 2026
- Merchant payment via wallets on UPI to attract 1.1% interchange from Apr 1, Business Standard, 29 March 2023
- ‘No UPI Day’ withdrawn after traders meet FM Sitharaman over proposed MDR, Business Today, 30 September 2026
- NPCI extends 30% UPI market share cap deadline to December 2026, Business Today, 31 December 2024
- UPI in August: Navi’s market share climbs to 4.4%, PhonePe and Google Pay slip, Inc42, September 2026
- RBI backs government’s MDR framework, The Tribune
- Breaking down the PhonePe DRHP, Finshots, January 2026, and PhonePe FY26 results, Inc42, July 2026