NPCI Defers First Ever UPI Merchant Fee Until After Diwali, No New Date

For more than six years, merchants across India have accepted payments on the Unified Payments Interface without paying a fee, a policy choice that helped turn a homegrown system into the world's busiest retail payments network. That free run was supposed to end on October 15, 2026, when the National Payments Corporation of India planned to introduce a Merchant Discount Rate on a defined set of person to merchant UPI transactions. It did not happen. On October 13, two days before the charge was due to take effect, NPCI deferred the rollout until immediately after Diwali and said a new implementation date would be notified separately.

The fee at the centre of the dispute is modest on paper: 0.4 percent, or 40 basis points, on eligible bank account to merchant UPI transactions above ₹2,000, which is roughly $21. The structure NPCI circulated last month exempted payments of ₹2,000 or less and small merchants that receive less than ₹100,000 (about $1,033) a month through UPI, and it capped the charge at ₹300 (around $3) for larger transactions. The reported design also included a cap of ₹300 for transactions of ₹75,000 and above, along with a flat ₹5 rate for select categories.

What made the proposal contentious was not its arithmetic but its symbolism. UPI had not always been free for merchants. Banks and payment providers previously charged merchants for transactions, and the Indian government scrapped those fees in January 2020 as it sought to encourage more people to shift away from cash. Retailers and petrol pump operators organised against the reintroduction of charges, and some warned they could stop accepting UPI payments altogether if the levy took effect.

TechCrunch reported on October 13 that NPCI postponed the October 15 rollout following broad pushback from merchants across the country, citing the festive shopping season. By the end of the day, the payment industry's listed names had moved sharply. CNBC-TV18 reported on October 13 that shares of Paytm, Pine Labs and MobiKwik fell as much as 7 percent after the outlet reported exclusively that the rollout was likely to be deferred, before recovering once NPCI confirmed it would be implemented immediately after Diwali.

Key Facts

In an official statement issued on Tuesday, October 13, NPCI said its UPI and Services Steering Committee had decided, keeping the festive season in mind, that MDR on select Person to Merchant (P2M) UPI transactions would be implemented immediately after Diwali, at a date to be notified separately. The rollout had earlier been scheduled to take effect from October 15. CNBC-TV18 reported on October 13 that merchant payments made up nearly two thirds of UPI transactions: in June 2026, 63.5 percent of UPI transactions were peer to merchant payments, while 36.5 percent were peer to peer.

Peer to peer transfers, however, accounted for roughly seven tenths of overall transaction value. ETGovernment reported on October 13 that more than 95 percent of UPI merchant payment transactions by volume are expected to remain free, limiting the charge largely to higher value transactions, while in value terms industry estimates suggest a significantly larger share of transactions will attract MDR. Under the proposed revenue sharing arrangement, issuing banks are expected to receive 16 basis points of the 40 basis point MDR, while acquiring banks will receive about 12 basis points, with the balance distributed among consumer facing applications and payment service providers.

ETGovernment reported on October 13 that NPCI chief executive Dilip Asbe had recently said the UPI ecosystem costs about ₹21,000 crore annually to operate and that the 40 basis point charge could help recover around ₹13,000 crore to ₹15,000 crore in the first year. NPCI has separately estimated the annual cost of running UPI at about ₹200 billion, roughly $2.1 billion, including spending on server capacity, fraud prevention and technical support. Banks and payment companies have argued for years that they need a way to recoup those costs as transaction volumes grow, and NPCI has said it would share the money collected among participants in the UPI ecosystem to help pay for infrastructure, cybersecurity and fraud prevention.

The volumes involved are enormous. TechCrunch reported on October 13 that UPI processed 24.07 billion transactions worth ₹29.37 trillion, about $305 billion, in September 2026 alone. The government has budgeted about ₹12,000 crore for UPI and RuPay incentives in FY27, significantly below the estimated cost of operating the ecosystem, and no subsidy has been paid since April 2025. Earlier payouts stood at ₹3,631 crore in FY24 and ₹1,046 crore in FY25.

Analysis

What this really means is that the argument in India is no longer about whether merchants will eventually pay something for UPI, but about who absorbs the cost of a network that has outgrown its subsidy. The deferral changes the timing of the MDR framework rather than the structure, and NPCI's October 13 statement left open whether the rates, thresholds or other terms would survive the pause. For payment companies, the reprieve is real but temporary: their shares swung on the mere rumour of a delay before recovering on confirmation.

Abizer Diwanji of Neostrat Advisors said the deferment offers temporary relief during the festive season but does not change the underlying case for introducing MDR, adding that the immediate impact would be on merchants' profitability rather than consumer demand. That distinction matters. The festive quarter is when retailers earn a disproportionate share of annual revenue, which explains why NPCI cited the shopping season first and the mechanics of implementation second.

Raman Khanduja, co-founder and CEO of Mintoak, said MDR on a defined set of higher value UPI merchant transactions could give banks a stronger economic incentive to invest in merchant acquiring and build broader banking relationships with small businesses. RBI Governor Sanjay Malhotra had said earlier this month that he did not expect the introduction of a small fee to materially affect transaction volumes, and industry executives argue that a large part of the transaction value that will attract MDR comes from merchants already accepting credit cards and other paid payment instruments.

Put together, the case for MDR rests on economics rather than consumer behaviour. The charge is capped, narrowly targeted and, by volume, touches less than one twentieth of merchant transactions. That is a deliberately small footprint for a change that would end a zero MDR regime and set a precedent for how UPI merchant acceptance is priced in the years ahead.

Why It Matters

The deferral matters because UPI's free merchant model has been funded by a subsidy that is shrinking. The government has budgeted about ₹12,000 crore for UPI and RuPay incentives in FY27, well below the roughly ₹21,000 crore that NPCI says the ecosystem costs to run each year, and no subsidy has been paid since April 2025. When a network carries 24.07 billion transactions a month and still has no direct revenue line, the gap between policy ambition and operating reality becomes a matter of time rather than principle.

It also matters for the shape of India's payment market. Merchant payments were 63.5 percent of UPI transactions by volume in June 2026, and the platform is dominated by Google Pay and PhonePe, with Paytm, Pine Labs and MobiKwik operating across the merchant acquiring stack. A working MDR would give banks a direct financial stake in merchant acquiring, which could loosen the hold of the largest consumer facing apps over the economics of acceptance.

Finally, timing carries its own risk. If the charge returns immediately after Diwali with the same terms, merchants will have had only weeks to prepare, and the same retail and fuel trade groups that threatened to stop accepting UPI may renew that threat. If NPCI softens the structure to avoid a repeat confrontation, the first year of MDR revenue will fall short of the ₹13,000 crore to ₹15,000 crore recovery estimate that Dilip Asbe has floated.

Next Up

NPCI has not set a date. The new implementation timeline will be notified separately, and the October 13 statement did not say whether the 0.4 percent rate, the ₹2,000 threshold, the ₹300 cap or the flat ₹5 category rate will be carried over unchanged. For now, merchants can plan around an October 15 that will pass without a charge and a festive season in which UPI remains free at the point of acceptance.

The next signal will be NPCI's notice, and after that the first full month of MDR volumes, which will show whether the levy raises the ₹13,000 crore to ₹15,000 crore that the ecosystem's operators believe is available, or whether the retail pushback that produced this delay returns in a sharper form.