The truth about UPI payment charges

The truth about UPI payment charges

UPI is free for the vast majority of Indian payments in FY 2026-27. Person-to-person transfers and bank-account-funded merchant payments carry zero MDR (Merchant Discount Rate), zero customer charge, and zero recipient charge — by NPCI (National Payments Corporation of India) policy backed by RBI mandate. The sole meaningful exception is PPI (Prepaid Payment Instrument) wallet-funded payments to merchants above ₹2,000, where an interchange of up to 1.1% applies to the merchant, not the consumer. International UPI corridors carry forex margins set by overseas scheme operators, not NPCI. Every other charge you may have read about is either a myth, a remnant of an older payment rail, or applies to a product — like a credit card riding the UPI rail — that has always carried MDR.

The complete UPI charge matrix for FY 2026-27

Before diving into detail, here is the full picture in one place. Print this and keep it next to your payment gateway reconciliation.

This matrix applies unless NPCI or RBI notifies a revision. It answers around 80% of the questions finance teams and founders ask about UPI costs.

Why P2P UPI is permanently free: the regulatory architecture

The zero-charge guarantee on person-to-person UPI is not a marketing promise from an app provider — it is embedded in regulatory architecture. Banks participating in UPI are prohibited under NPCI operating guidelines from levying per-transaction fees on P2P transfers (bank account to bank account via BHIM, PhonePe, Google Pay, or any UPI-enabled app).

This design is deliberate. When NPCI launched UPI in 2016, the policy rationale was financial inclusion: a platform where a migrant worker in Mumbai can send ₹500 to their family in rural Bihar without losing ₹15 to a transfer fee. That intent has been reaffirmed consistently.

Three pillars hold the zero-charge guarantee in place:

1. NPCI operating guidelines bind all member banks against levying per-transaction P2P UPI charges on customers.
2. RBI's authority under the Payment and Settlement Systems Act 2007 gives RBI the power to mandate payment charge structures. RBI has exercised this.
3. Annual Budget reaffirmation: Union Budget 2026 continued the government's explicit commitment that UPI will remain free for consumers — consistent with every Union Budget since 2020.

If your bank ever charges you for sending money to a friend via UPI, that is a violation of NPCI rules. You can raise a formal complaint through the RBI Banking Ombudsman at cms.rbi.org.in at no cost.

What about UPI Lite?

UPI Lite, now enabled by most major banks, handles transactions up to ₹500 per transaction using an on-device wallet that is loaded from your bank account. It processes off the core NPCI UPI infrastructure to reduce server load at the NPCI end, but from a charge perspective it is identical to regular UPI: zero cost to the payer, zero cost to the payee.

Zero MDR on merchant payments: what the policy actually covers

The most persistent misconception is that zero-MDR applies only to "small merchants" and that large businesses will eventually be charged. That is not how the current policy is framed.

MDR on UPI P2M (Person-to-Merchant) bank-funded transactions is zero regardless of merchant size, transaction value, or monthly volume — as long as the customer's payment is funded from a bank account and not a PPI wallet or credit card.

This zero-MDR position was established from 1 January 2020 and applies uniformly: a roadside vendor with a ₹50 BharatPe QR code and a large e-commerce platform processing ₹500 crore a month in UPI both pay the same MDR on bank-funded UPI — nil.

What "accepting UPI" includes:

• Static or dynamic QR codes (PhonePe Business, Google Pay for Business, Paytm Soundbox, BharatPe, Pine Labs)
• UPI payment links sent via WhatsApp or email
• UPI collect requests
• E-commerce checkout integrations via payment gateways (Razorpay, Cashfree, PayU, CCAvenue)
• UPI AutoPay mandates for recurring billing (SIPs, subscriptions, loan EMIs)

One clarification on payment gateways: a gateway's platform fee — typically ₹0 to ₹3 per UPI transaction, or a monthly subscription — is a commercial charge for using the platform's technology and settlement infrastructure. It is not MDR. It is not a regulatory cost. It is a vendor charge, and it is subject to GST at 18% (which you can claim as Input Tax Credit if you are GST-registered and using the service for business purposes).

UPI AutoPay and recurring mandates

UPI AutoPay — the mandate-based recurring payment mechanism used for SIPs, OTT subscriptions, insurance premiums, and loan EMIs — carries zero MDR for bank-account-funded executions. Setting up the mandate is free; each execution is free. For a business billing customers monthly via UPI AutoPay, the pure payment cost is nil on the mandate execution side.

PPI wallet UPI: the 1.1% interchange explained precisely

This is the section that most commentary either skips or states imprecisely. Let's be exact.

What is a PPI-funded UPI transaction?

When a customer pays using their Paytm Wallet balance, MobiKwik balance, Amazon Pay Balance, or PhonePe Wallet — not their linked bank account — the payment is PPI-funded. These wallets are regulated by RBI as Prepaid Payment Instruments under the Payment and Settlement Systems Act 2007. NPCI permitted PPI issuers to link wallets to UPI handles, enabling wallet-balance-funded UPI scans.

The NPCI interchange circular

From April 2023, NPCI introduced an interchange mechanism for PPI-funded UPI transactions above ₹2,000 to merchants. The rate is up to 1.1% of the transaction value. This interchange moves through the settlement chain — from the acquiring bank/PSP to the PPI issuer — and reflects the cost of processing a wallet-funded transaction that sits outside the bank-account-to-bank-account flow.

Who actually bears this cost:

• The interchange is paid by the merchant's acquiring bank or PSP — not the consumer.
• Depending on the merchant's agreement with their payment gateway, the gateway may absorb it or pass it through as a higher effective rate on PPI-funded transactions.
• RBI and NPCI have explicitly prohibited merchants from passing this charge to consumers. A merchant who adds a surcharge on a UPI payment — even a PPI-funded one — violates NPCI's merchant operating rules.

The ₹2,000 threshold in practice:

• Customer pays ₹1,500 from PhonePe Wallet via UPI scan: interchange = ₹0
• Same customer pays ₹3,200 from the same wallet: interchange up to ₹35.20 (1.1% × ₹3,200) sits somewhere in the acquiring chain

For merchants with higher average order values accepting wallet payments, this is a real cost to model. For most micro-merchant and retail use cases where wallet payments are common at ticket sizes below ₹2,000, the interchange does not apply.

RuPay credit card on UPI: the exception that surprises merchants

When a customer pays using a RuPay credit card linked to their UPI app — or a Visa/Mastercard credit card where the bank has enabled UPI linking — MDR applies. The UPI rail carries the payment instruction, but the underlying credit card economics do not disappear just because the interface is a QR code.

MDR on credit cards on UPI is set by the card network (NPCI for RuPay, Visa and Mastercard for their respective networks) in consultation with the acquiring bank, and varies by MCC (Merchant Category Code):

• Utilities, government services: lower rates, often 0.5% or below (as notified)
• General retail, food, apparel: typically 0.5%–1.0%
• Travel, premium retail: up to 1.5%–2.0%

For FY 2026-27, exact rates are as notified by NPCI and the card networks. Your payment gateway's merchant agreement will specify the applicable rate per MCC.

Why this trips up finance teams: Monthly settlement reports from gateways like Razorpay and Cashfree break UPI into sub-categories. If your UPI line shows a non-zero effective rate, it is almost always because some portion of your UPI volume was credit-card-funded. Segment the report by payment instrument — not just payment method — before presenting your merchant cost analysis.

Cross-border UPI: real charges in international corridors

UPI's international footprint as of FY 2026-27 includes Singapore, UAE, Bhutan, Nepal, Sri Lanka, Mauritius, France, and several other destinations. Each corridor has its own charge structure.

UPI-PayNow: the India–Singapore corridor

The UPI-PayNow linkage — jointly enabled by NPCI and Singapore's Monetary Authority — allows real-time transfers between Indian bank accounts and Singapore PayNow-linked accounts. Transfers are subject to per-transaction and daily limits as notified by NPCI/RBI.

Where the charges sit:

• NPCI does not levy a per-transaction interchange on UPI-PayNow
• Your Indian bank may charge a remittance service fee (typically ₹0 to ₹150 depending on the bank, with many digital-first banks charging nothing)
• The real cost is the forex conversion margin: banks quote a rate that includes a spread over the mid-market rate, typically 1.0%–3.5% depending on the bank and the transaction size
• GST at 18% applies on the bank's service fee component and on the gross forex margin (calculated under the slab method for money-changing services)

LRS compliance and TCS

All outward international transfers from India — including cross-border UPI — fall under RBI's Liberalised Remittance Scheme (LRS). An individual can remit up to USD 2,50,000 per financial year.

TCS under Section 206C(1G) of the Income-tax Act 1961 applies to LRS remittances:

• First ₹7 lakh per FY: Nil TCS for most categories
• Above ₹7 lakh for general purposes: 20% TCS collected at source by the authorised dealer bank, creditable against your tax liability for AY 2027-28
• Education via loan from financial institution: 0.5% (no threshold)
• Education from own funds / medical treatment: 5% above ₹7 lakh

Most cross-border UPI transactions are low-value (daily limits are set at modest levels by NPCI/RBI). A frequent international traveller or someone remitting regularly to family abroad should track their cumulative LRS outflows — the 20% TCS on amounts above ₹7 lakh is not a penalty but it does create a cash-flow timing difference recoverable only on filing ITR for AY 2027-28.

UPI acceptance at overseas merchants

When you scan a QR code at a merchant in Dubai or Paris and pay in rupees, you are making an LRS-reportable cross-border payment via UPI. The merchant receives local currency. The forex margin applies. No NPCI MDR applies on the merchant's side, but your bank's forex spread is the real cost.

How zero-MDR stays sustainable: the government incentive scheme

A question every finance head asks: if MDR is zero, how do banks and payment processors stay economically viable on UPI?

The answer is the government incentive scheme for low-value UPI transactions, administered through MeitY (Ministry of Electronics and Information Technology). This scheme reimburses acquiring banks, PSPs, and app providers for processing zero-MDR UPI transactions, based on eligible transaction volumes. Union Budget 2026 continued the allocation for this scheme.

The policy implication for merchants and CFOs: Zero-MDR UPI is not a temporary promotional position that will be reversed in the next budget cycle. It is government digital infrastructure policy, backed with an annual budget line item. The government views UPI as a public good — analogous to road infrastructure — and has chosen to fund the cost through general taxation rather than per-transaction levies.

Plan your payment cost models accordingly. A business that is building multi-year unit economics on zero-MDR UPI for bank-funded transactions has a stable regulatory foundation to rely on.

GST on UPI-related charges: when 18% applies

For standard bank-funded P2P and P2M UPI, there is no consideration, so there is no supply of service for GST purposes and no GST arises.

Where GST at 18% does apply:

• PPI interchange (up to 1.1%): The interchange is a fee for payment facilitation flowing between the PPI issuer, NPCI, and the acquiring bank. GST applies on the interchange in the B2B settlement chain. This does not appear as a separate line item on the consumer's screen, but it flows into the acquiring cost structure.
• Payment gateway platform fees: If your gateway charges ₹2.50 per UPI transaction, GST of ₹0.45 is due — total ₹2.95. For a merchant processing 2,000 UPI transactions a month, the GST component alone is ₹900 per month. If you are GST-registered and the service is used for your business, this is fully creditable as Input Tax Credit (ITC) — claim it. Maintain proper tax invoices from the gateway; many portals allow you to download monthly consolidated invoices.
• Bank remittance fees for cross-border UPI: 18% GST on the service charge component.
• Forex conversion margin: Calculated under the slab method for money-changing services prescribed under GST rules. For small individual transfers, the GST amount is marginal.

Common mistakes and costly assumptions

Mistake 1: Modelling "all UPI = free" in your P&L

E-commerce founders who build gross margin models assuming zero payment cost on UPI are typically ignoring: the gateway platform fee, PPI interchange pass-through on wallet-funded transactions above ₹2,000, and credit-card-on-UPI MDR. Pull your actual gateway settlement report for 90 days, segment by funding instrument, and build your actual blended payment cost rate before presenting a board deck.

Mistake 2: Surcharging customers for UPI

Some merchants in travel, hospitality, and B2C services have added a "UPI convenience fee" or "payment surcharge." This violates NPCI's merchant operating guidelines. Bank-account-funded UPI payments must be accepted at the price displayed to the customer with no surcharge. Customers can report this violation to NPCI and to the acquiring bank. Aggregators who discover this in merchant accounts can terminate merchant agreements.

Mistake 3: Confusing IMPS/RTGS charges with UPI charges

IMPS and RTGS are different payment rails and carry different charges. Banks charge for IMPS (typically ₹2.50–₹15 depending on value) and RTGS (typically ₹24.50–₹49.50 for outward transfers, as notified). Some bank portals use ambiguous transaction descriptions that can look like UPI. If you see a payment charge on your account, check the payment method code — not just the narrative description — before concluding you were charged for UPI.

Mistake 4: Forgetting LRS accumulation on international UPI

Frequent travellers to UPI-accepting countries who routinely use UPI abroad accumulate LRS remittance amounts. If you travel to Singapore, UAE, and France across FY 2026-27 and regularly settle your bills via UPI, your bank is reporting each transaction under LRS. Crossing ₹7 lakh in aggregate triggers 20% TCS on the excess. The TCS is creditable against your income tax liability for AY 2027-28 but ties up cash in the interim.

Mistake 5: Not claiming ITC on gateway fees

Every rupee of GST you pay to your payment gateway on its platform/service fee is ITC-eligible if you are a GST-registered business using the service for taxable supply. Many small merchants leave this unclaimed either because they do not collect the tax invoice from the gateway or because they have not connected this cost to their ITC reconciliation.

Worked example: a D2C brand's actual UPI cost for April 2026

StyleKart is a direct-to-consumer apparel brand with online and physical store sales in Bengaluru. Here is their April 2026 UPI settlement data:

Cost calculation:

1. Bank-funded UPI: ₹18,00,000 × 0% MDR = ₹0
2. PPI wallet ≤ ₹2,000: ₹1,20,000 × 0% = ₹0
3. PPI wallet > ₹2,000: ₹3,80,000 × 1.1% = ₹4,180 (passed through by gateway or absorbed — check the agreement)
4. RuPay credit card on UPI: ₹2,40,000 × 0.9% (assumed MCC rate) = ₹2,160
5. Gateway platform fee: 1,250 transactions × ₹2.50 = ₹3,125 + GST ₹562.50 = ₹3,687.50 (ITC claimable by StyleKart as a GST-registered entity)

Total effective payment cost: ₹9,027 on ₹25,40,000 volume — an effective rate of 0.36%.

Compare this to a business running on credit cards, where the blended MDR would be ₹40,000–₹50,000 on the same volume. The numbers explain why UPI has displaced card payments in physical retail.

StyleKart's action items: Confirm with the gateway whether the ₹4,180 PPI interchange is being absorbed or passed through; verify the RuPay credit card MDR rate against their merchant agreement; and ensure the GST invoice from the gateway is being pulled monthly for ITC.

Key takeaways

• Bank-account-funded UPI — P2P and P2M — is zero cost for all parties under NPCI/RBI policy that is explicitly reaffirmed through FY 2026-27 and backed by Union Budget 2026.
• The 1.1% PPI interchange is narrow in scope: it applies only when the source of funds is a PPI wallet (not a bank account), the amount exceeds ₹2,000, and it is borne by the merchant/acquirer — never the consumer.
• Credit card on UPI = credit card MDR. The UPI interface does not remove the economics of credit issuance. Segment your settlement data by funding instrument before drawing cost conclusions.
• Cross-border UPI costs are driven by forex margins and LRS-TCS (Section 206C(1G)), not by NPCI. Track your cumulative LRS remittances if you use UPI abroad regularly.
• Your real cost as a merchant is the payment gateway's platform fee, not MDR — and the GST on that fee is fully ITC-eligible for GST-registered businesses.
• Surcharging customers for UPI is prohibited under NPCI rules, regardless of whether the transaction is bank-funded or PPI-funded.
• Model payment costs by funding instrument, not just payment method: the difference between 0% and 1.1% on wallet-funded transactions above ₹2,000 can meaningfully affect margin on high-AOV businesses.