UPI Transaction Charges

Introduction

The Unified Payments Interface (UPI) has revolutionised how millions of Indians conduct financial transactions daily (read more about UPI here). With billions of transactions processed monthly, understanding the current fee structure, charges, and regulatory changes are useful for both individuals and merchants. While UPI remains free for most personal transactions, specific changes regarding merchant fees will be talked about in this article.

Personal UPI Transactions: What You Need to Know

First, the great news: Standard bank-to-bank UPI transactions for individual users remain completely free. Whether you are...

• Sending money to friends or family 👫
• Paying utility bills 💡
• Making purchases at local stores 🛍️

...there will be no UPI transaction or UPI payment charges. These peer-to-peer (i.e. when one individual sends money to another individual) and peer-to-merchant (i.e. when one individual pays a company for a service) transactions create no charges when facilitated directly from your UPI account. This zero-fee structure has been instrumental in UPI's massive adoption across India. The story looks however different for merchants.

Merchant UPI Transactions: Understanding the 1.1% Interchange Fees

This part focuses on why merchant UPI transactions face up to 1.1% interchange fees.

What Are PPIs and Why Do They Matter?

Prepaid Payment Instruments (PPIs) are digital wallets like Paytm or PhonePe, which allow users to store money for digital transactions. While transactions directly from bank accounts remain free, UPI payments made through these wallets are subject to different rules.

Interchange Fee Structure

An interchange fee of up to 1.1% applies to UPI transactions exceeding ₹2,000 made through these PPIs. This fee is paid by the merchant who receives the payment, not by the customer making the purchase.

The exact percentage varies by merchant category:

For example, if a customer uses their PhonePe wallet to make a ₹2,500 payment at a supermarket, the merchant would pay an interchange fee of approximately ₹22.50 (0.9%).

Proposed Changes for Large Merchants

The government is currently evaluating a proposal to reintroduce Merchant Discount Rates (MDR) on UPI and RuPay debit card transactions for larger businesses. This would primarily affect merchants with annual Goods and Services Tax (GST) turnover exceeding ₹40 lakh.

Under the proposed tiered pricing model, larger merchants would pay higher fees, while smaller businesses would pay reduced rates or potentially none at all. The banking industry has formally requested this change, arguing that large merchants who already pay MDR on other payment methods (like Visa and Mastercard) should also contribute to UPI transaction costs.

Wallet-Loading Service Charges

NPCI has also introduced a wallet-loading service charge of 0.15% for PPI issuers when wallet recharges exceed ₹2,000. For instance, if you recharge your PhonePe wallet with ₹5,000, PhonePe will pay a 0.15% charge to your bank. This fee is borne by the wallet provider, not the customer.

Recommendations regarding UPI Transaction Charges

For Individual Users

• Prefer Bank-to-Bank Transfers. Continue using direct bank-linked UPI payments whenever possible to avoid any potential fees that might be passed on by merchants in the future.

For Merchants

• Monitor Your Transaction Volume. Small merchants with monthly UPI receiveables below ₹50,000 are generally exempt from interchange fees. Monitor your transaction volumes to understand if you have to pay fee.
• Optimize Payment Acceptance. For transactions exceeding ₹2,000, consider only accepting bank-to-bank UPI payments versus wallet-based transactions to not pay a fee.
• Prepare for Potential MDR. Larger businesses with annual turnover exceeding ₹40 lakh should prepare for the possible reintroduction of merchant discount rates on UPI transactions.

Conclusion

The UPI revolution is striving to balance its projected annual cost structure of ₹7.2 trillion in 2025 with its goals for digital inclusion. India's goal with UPI is to ensure the system remains affordable, sustainable, and accessible to everyone, helping guarantee that it continues to be widely available and cost-effective for the vast majority of users.

While merchants face some interchange fees for wallet-based transactions and potential new MDR charges for larger businesses, individuals still can enjoy free UPI transactions.