Apr 19, 2025
I. Introduction: UPI Charges - Separating Fact from Fiction
The Unified Payments Interface (UPI), launched in 2016 by the National Payments Corporation of India (NPCI) under Reserve Bank of India (RBI) guidance, has transformed India's financial landscape. As the preferred digital transaction mode, UPI's success lies in its free, fast, secure, and seamless user experience for real-time bank-to-bank transfers using simple identifiers. A key driver of its widespread adoption has been its zero-cost nature for end-users, a deliberate policy to boost digital payments.
However, in late March 2023, significant confusion arose from reports suggesting that UPI transactions over ₹2000 would incur a 1.1% charge. This caused concern among users and merchants reliant on the free platform.
This report clarifies the official stance on UPI charges, explains the specific regulatory update concerning Prepaid Payment Instruments (PPIs) that caused the confusion, and differentiates between affected and unaffected transaction types. It also examines the policy rationale, market dynamics, and implications for India's digital payments ecosystem, based on official communications and data.
II. The Official Stance: Standard UPI Payments Remain Free for All Users
Responding swiftly to the confusion, NPCI issued a definitive clarification on March 29, 2023. An official press release stated: "The interchange charges introduced are only applicable for the PPI merchant transactions and there is no charge to customers, and it is further clarified that there are no charges for the bank account to bank account based UPI payments (i.e. normal UPI payments)." This message was consistently reinforced.
This confirmation covers the vast majority of UPI activity. Peer-to-peer (P2P) transfers between individuals and peer-to-merchant (P2M) payments made directly from a user's linked bank account remain entirely free. NPCI emphasized that these conventional bank account-to-account transactions, constituting over 99.9% of UPI volumes, incur no charges for customers or merchants.
Government agencies, including the Press Information Bureau (PIB) and the Ministry of Finance, actively debunked misleading claims and reiterated the free nature of standard UPI, also clarifying the non-applicability of Goods and Services Tax (GST). The rapid, multi-channel official clarifications highlighted the importance of maintaining public trust in UPI's core value proposition and countering misinformation about the dominant, free bank-to-bank transactions.
III. Unpacking the Confusion: The Genesis in the March 2023 NPCI Circular
The confusion originated from an NPCI circular (NPCI/UPI/OC No. 164/2022-23) issued on March 24, 2023, following RBI guidelines allowing Prepaid Payment Instruments (PPIs), like digital wallets, to join the interoperable UPI ecosystem. This meant wallet users could pay any UPI merchant by scanning a standard QR code, a significant enhancement from previous restrictions.
The circular introduced an interchange fee, but only for merchant transactions exceeding ₹2000 initiated using a PPI (like a digital wallet) via UPI.
The mention of a "1.1% fee" for "UPI transactions above ₹2000" was misinterpreted. Many overlooked the crucial conditions: payment origin (PPI) and destination (merchant). This led to the incorrect belief that the fee applied universally to all UPI payments over ₹2000. The distinction between a backend interchange fee (common in payment networks, often invisible to users) and a direct user charge was lost. The introduction of a complex, conditional fee into a simple, zero-cost ecosystem, coupled with limited public understanding of terms like "PPI" and "interchange," fueled the confusion.
IV. Demystifying the PPI Interchange Fee
Understanding the March 2023 NPCI circular requires clarity on its components.
Defining PPIs: PPIs are tools storing value electronically for purchases, bill payments, or money transfers (e.g., digital wallets like Paytm Wallet, PhonePe Wallet, gift cards, meal vouchers). Users load funds from bank accounts, cards, or UPI.
Interchange Fee Explained: An interchange fee is common in payment systems, transferred between financial institutions processing a transaction. In this context, it's paid by the merchant's acquirer (bank/payment provider facilitating UPI acceptance) to the customer's PPI issuer (wallet company). This compensates the issuer for managing the wallet within the interoperable UPI system. Crucially, this fee is not charged to the end customer.
Applicability Criteria: The fee applies only if:
Payment Method: Originates from a PPI wallet via UPI.
Transaction Type: It's a merchant (P2M) transaction. P2P and P2PM (small merchants receiving ≤₹50,000/month via UPI) are exempt.
Transaction Value: Exceeds ₹2000. Transactions ≤₹2000 are exempt.
Fee Structure Details:
Interchange Rate: Maximum 1.1% of transaction value.
Category Variation: The rate depends on the merchant category (MCC). For example, fuel is 0.5%; telecom, utilities, education, agriculture are 0.7%; supermarkets 0.9%; mutual funds, government, insurance, railways 1.0%; convenience stores, specialty retail 1.1%.
Review Clause: Pricing effective April 1, 2023, subject to review by September 30, 2023.
Wallet Loading Service Charge: Separately, a 'wallet loading service charge' applies when a user loads over ₹2000 into their PPI wallet using UPI from their bank account. The PPI issuer pays 15 basis points (0.15%) to the user's bank (remitter bank). This is a cost for the wallet company, not the customer.
The PPI interchange fee structure aims to enable PPI interoperability by providing a revenue path for wallet issuers, targeted only at higher-value commercial transactions, balancing ecosystem needs without disrupting the free experience for most users.
V. Who Pays the Price? Clarifying the Cost Burden
Identifying who bears the cost of the PPI interchange fee is crucial.
Customer Impact: Customers do not pay the interchange fee when using a PPI wallet via UPI, nor the wallet loading service charge. Standard bank-account UPI remains free. Even for qualifying PPI-UPI payments (>₹2000 to a merchant), the fee is handled backend, invisible to the consumer.
Interchange Fee Flow: The fee is a business-to-business transfer. The merchant acquirer pays the fee to the PPI issuer. Example: A customer uses Paytm Wallet for a ₹3000 purchase via a PhonePe QR code. PhonePe (acquirer) pays the interchange fee (e.g., 1.1% or ₹33) to Paytm (issuer). The customer pays only ₹3000.
Merchant Impact: The key question is whether merchants absorb this cost. The acquirer, having paid the fee, might:
Absorb the Cost: Especially for strategic merchants.
Pass-Through to Merchant: Likely incorporate the fee into the Merchant Discount Rate (MDR) or transaction fees for qualifying PPI-UPI payments (>₹2000). This mirrors card payment practices.
Limited Scope: This potential cost increase is specific: only for payments via PPI wallet using UPI, exceeding ₹2000. Small merchants (P2PM category) are exempt. Impact concentrates on medium-to-large merchants processing higher-value wallet transactions.
Wallet Loading Fee Burden: The 15 bps wallet loading charge is borne by the PPI issuer (wallet company), paid to the remitter bank. Not passed to the customer.
The mechanism shields consumers but introduces potential costs for larger merchants for specific high-value wallet transactions, subtly fragmenting the previously uniform zero-cost merchant landscape.
VI. Key Distinction: Bank-to-Bank UPI vs. PPI-UPI Merchant Payments
Understanding the two main UPI payment methods is key.
Standard UPI (Bank Account-to-Bank Account): The most common method. Users link bank accounts to UPI apps. Payments (P2P or P2M) debit the payer's bank account directly and credit the recipient's bank account via UPI. This accounts for >99.9% of transactions and remains entirely free for all parties.
PPI-UPI Merchant Payment: Uses funds stored in a PPI wallet (loaded previously) to pay via UPI, typically by scanning a merchant's UPI QR code. Funds transfer from the wallet balance to the merchant's account via UPI. Only this type – from a PPI wallet, to an eligible merchant, exceeding ₹2000 – triggers the backend interchange fee between the acquirer and issuer.
Rationale for the Difference: Standard bank-to-bank UPI is promoted as a 'digital public good' with Zero MDR and government subsidies. PPIs, often issued by non-banks, incur costs managing stored value accounts. The interchange fee provides a targeted mechanism for PPI issuers to recover costs/generate revenue within the interoperable UPI framework, deemed less necessary for the subsidized bank-to-bank model.
UPI now has a dual cost structure for merchants: zero-cost for bank-originated payments, potential backend cost (interchange fee) for PPI-originated payments >₹2000. This enables PPI interoperability without altering the free nature of dominant bank-based UPI.
VII. The Rationale for Free UPI: Policy Goals and Public Good
Keeping standard UPI free is a cornerstone of India's digital payments strategy.
Driving Digital Adoption & Cash Reduction: Free UPI incentivizes consumers and merchants (especially small businesses) to shift from cash, boosting digital transaction volumes.
Financial Inclusion: Free, accessible UPI helps bring millions, including the underserved, into the formal financial system.
The 'Digital Public Good' Philosophy: The government frames UPI as essential infrastructure yielding broad societal benefits (efficiency, transparency, innovation). Like physical infrastructure, access should be universal at minimal/zero cost to maximize public good.
Zero MDR Policy & Government Incentives: This led to Zero Merchant Discount Rate (MDR) on UPI (and RuPay debit) from Jan 1, 2020, removing a key merchant cost barrier. To compensate providers for lost revenue, the government introduced incentive schemes (e.g., ₹1,389 cr FY22, ₹2,210 cr FY23, ₹3,631 cr FY24), supporting the subsidized model.
RBI's Discussion Paper (The Underlying Tension): Despite the government stance, economic realities persist. RBI's Aug 2022 discussion paper acknowledged UPI ecosystem costs (est. ₹2/transaction then) and sought feedback on charges (like tiered fees) for financial sustainability. Though the government quickly reiterated no plans for charges on standard UPI, the paper highlighted the tension between free access and a viable economic model for providers.
The free standard UPI policy is a state-supported strategy prioritizing adoption and inclusion over market-driven cost recovery. The 'digital public good' narrative justifies subsidies, but tension remains between this strategy and the financial needs of private sector participants investing in the platform.
VIII. Ecosystem Impact: Analyzing the Ripple Effects of the PPI Fee
The PPI interchange fee, while not directly costing consumers, affects the ecosystem.
Impact on PPI Providers (Wallets):
Revenue Opportunity: Creates potential revenue when users make qualifying PPI-UPI payments (>₹2000 to merchants). Beneficial for players like Paytm with large wallet bases.
New Costs: Face the 15 bps wallet loading service charge when users load >₹2000 via UPI, a potentially significant operational cost.
Competitive Dynamics: May influence competition; providers might absorb loading costs or incentivize wallet use. Could favor larger players.
Impact on Merchants:
Potential Cost Increase: Medium-to-large merchants may face higher costs if acquirers pass on the interchange fee for qualifying PPI-UPI payments.
Acceptance Behavior: Unlikely to cause refusal of UPI, but some might subtly discourage high-value wallet payments.
Small Merchant Exemption: Crucially exempts small merchants (P2PM), protecting local stores and aligning with inclusion goals.
Impact on Banks:
Remitter Banks: Gain modest revenue from the wallet loading charge.
Acquirer Banks: Must pay interchange fees; face strategic decisions on passing costs to merchants, adding complexity.
Overall Ecosystem Dynamics:
Facilitating Interoperability: Provides the financial mechanism for PPI interoperability, compensating issuers.
Testing Monetization Waters?: Seen as the first formal, transaction-based fee (though backend/limited) in P2M UPI since zero-MDR, potentially exploring future monetization.
Stimulating Innovation?: Revenue prospects might incentivize wallet providers to enhance features, potentially benefiting consumers.
The PPI interchange fee subtly reshapes financial incentives, providing revenue for wallets, potential costs for larger merchants on specific transactions, and complexity for banks. It's a cautious step towards sustainable funding beyond subsidies, tailored for PPI interoperability.
IX. UPI's Phenomenal Growth: A Statistical Overview
UPI's scale and growth underscore its critical role. NPCI data shows exponential adoption:
Monumental Scale & Growth:
Monthly Transactions: Reached 18.3 billion in March 2025, up significantly from ~8.7 billion in March 2023.
Monthly Value: Hit a record ₹24.77 lakh crore (approx. ₹24.77 trillion) in March 2025.
Fiscal Year Performance (FY25): Recorded ~185.85 billion transactions worth ₹260.56 lakh crore (approx. ₹260.56 trillion), up from ₹199.96 trillion in FY24.
Daily Averages (Mar 2025): Averaged over 590 million transactions/day, valued near ₹80,000 crore.
Year-on-Year Growth (Mar 2025 vs Mar 2024): Volume grew ~36%, value surged ~25%.
Global Leadership: India accounted for 49% of global real-time payments in 2023, driven by UPI.
UPI's growth is clear: March 2023 saw 8.69B transactions (₹14.10T). March 2024 hit 13.44B (₹19.78T) (YoY growth ~55% vol, ~40% val). March 2025 reached 18.30B (₹24.77T) (YoY growth ~36% vol, ~25% val vs Mar 2024). FY24 had 131.14B transactions (₹199.96T), surging in FY25 to 185.85B (₹260.56T) (YoY growth ~42% vol, ~30% val).
Source: Compiled from NPCI data.
Market Structure:
High Concentration: PhonePe (~47%) and Google Pay held >83% combined market share (vol) in March 2025.
Market Cap Regulation: Concentration persists despite NPCI's 30% market share cap guideline for TPAPs (deadline extended).
System Reliability: Generally high uptime (>99%), but scale means brief issues affect millions (e.g., incidents Jan 2022, Mar 2025).
UPI is critical infrastructure. Hyper-growth shows deep integration, but market concentration and stability remain challenges.
X. Broader Context and Future Outlook
The PPI interchange fee discussion occurs within a wider UPI context.
GST Clarification Recap: The Ministry of Finance confirmed no plans to levy GST on UPI. Rationale: GST applies to charges like MDR; since zero MDR is mandated for standard P2M UPI (since Jan 2020), there's no underlying charge for GST. This reinforces the free status of conventional UPI.
The Unresolved MDR Debate: Despite zero-MDR, the sustainability debate continues. Industry bodies (like PCI) and fintechs advocate for reasonable MDR, especially for larger merchants, arguing revenue is needed for costs, innovation, security, and provider viability. RBI's 2022 discussion paper exploring tiered charges remains relevant.
Public Sentiment as a Constraint: Surveys show strong user resistance (73-75% might stop using UPI if charged). This makes direct user fees politically sensitive, reinforcing the government's subsidized approach.
Future Trajectory: UPI will continue evolving (international expansion, UPI Lite, credit lines). The tension between the 'free digital public good' model and sustainable economics for providers will persist, shaping policy and industry dynamics. The PPI interchange fee is a small, calibrated step addressing PPI interoperability compensation without disturbing the core free model. The future holds innovation, deeper economic integration, and ongoing debate on balancing access and sustainability.
XI. Conclusion: Key Takeaways
This analysis clarifies UPI transaction charges, especially the March 2023 confusion. Key takeaways:
Standard UPI Remains Free: Bank account-to-bank account UPI payments (P2P and P2M) are entirely free for consumers and merchants, including transactions >₹2000. Official clarifications are unequivocal.
PPI Interchange Fee Explained: The 1.1% fee applies only to merchant payments above ₹2000 made using a PPI wallet via UPI. It's a backend fee between payment providers, not paid by the customer.
Policy Commitment to Free UPI: Swift official responses show strong commitment to accessible, affordable standard UPI. The 'digital public good' philosophy, zero-MDR, and government incentives prioritize adoption and inclusion.