The current UPI framework appears financially unsustainable and risks undermining critical investments in cybersecurity, fraud prevention and network infrastructure, due to inadequate subsidies, the Standing Committee on Finance told Parliament on Wednesday. In response, the government said it was currently looking at two ways to move forward with making the UPI platform self-sustaining.

The first option being explored is a charge on certain high value transactions and high turnover merchants, the Ministry of Finance informed the Committee. 

The other option, it said, was a “tiered incentive structure” so that the government can phase out its current scheme under which it compensates payment ecosystem players for a portion of the cost of processing low-value UPI transactions conducted at small merchants. It did not, however, elaborate on this structure.   

These submissions were revealed in the Committee’s report placed before the Lok Sabha on Wednesday. They were made in reply to the Committee’s recommendations to the government to find some way to make UPI financially sustainable without inflating the government’s budget.

Government’s two options

“Given the sustainability of the UPI ecosystem and the burden on the Government exchequer, the Department is currently exploring two options: (i) Examining the feasibility of restoring MDR for certain high threshold transactions/ merchants; and (ii) a tiered incentive structure to phase-out the Government support in the next few years,” the Department of Financial Services informed the Committee.

The Merchant Discount Rate (MDR) is a charge the payment ecosystem such as banks, payments processors, and gateways levy on merchants. Currently, while these charges are levied on most debit card and all credit card transactions, UPI and RuPay debit card transactions were exempted from this charge in 2020.  

Inadequate subsidies

The Committee found that the government’s current scheme to partially reimburse payment processors for the cost they incur for processing UPI transactions was significantly short of the actual cost. 

“The Committee remain deeply concerned by the staggering mismatch between the ₹2,000 crore allocation and the industry’s estimated operational cost of ₹20,700 crore,” the report said. 

It said that, while UPI is expected to process up to 150 billion transactions per month and add 600 million new users, the current government incentive covers “merely 11% of the industry’s actual costs and 14% of potential MDR collections” and “needlessly inflates” the overall Demand for Grants of the Department.  

Enabling law in place

It further took note of the fact that legislative amendments had now been made to empower the government to reimpose an MDR charge on UPI transactions. 

This was done through the Taxation and Other Laws (Amendment) Bill, 2026, passed in Lok Sabha on August 6, 2026, which said that the government can in the future notify the kinds of transactions that can attract such a charge. 

“In the view of the Committee, while statutory enablement now exists to permit calibrated MDR on high-value transactions, any delay in notifying and operationalising this framework leaves payment service providers heavily dependent on inadequate subsidies, thereby threatening critical investments in cybersecurity, fraud prevention, and network infrastructure,” the report said.