Government's major plan for UPI: Subsidies could end once banks start earning revenue from MDR..

Digital payments have become an integral part of everyone's life in India today. The use of UPI has become commonplace everywhere, from cities to villages. The government has consistently provided financial support to banks to build and strengthen this payment system. However, the UPI ecosystem is now undergoing a significant transformation. The government plans to discontinue the subsidy currently provided for low-value UPI transactions. The primary reason for this is the implementation of the Merchant Discount Rate (MDR) on large transactions. MDR has paved the way for banks to generate revenue from high-value payments. Consequently, the government believes that since banks will begin earning revenue on their own, there is no longer a compelling need to provide subsidies from the public exchequer.

**Avenues for bank revenue have opened up**

The digital transaction landscape has witnessed several major changes recently. The government has introduced MDR for large merchant payments. Under new NPCI regulations, an MDR of 0.4% will apply to select UPI merchant (P2M) payments exceeding ₹2,000, effective October 15, 2026.

As revenue generation from MDR on large payments begins, the government is preparing to phase out its financial support scheme. Both payment companies and banks will start earning transaction-based revenue directly from the network. Once the system becomes self-sustaining in terms of revenue, the government intends to stop providing financial assistance for small-value payments. According to an *Economic Times* report, while the government had allocated a budget of ₹2,000 crore for the 2027 fiscal year, no new subsidies have actually been disbursed since April 2025.

**Saving taxpayers' money**

A major reason behind this potential decision is the desire to save taxpayers' money. According to a senior banking sector official, the primary objective behind imposing the Merchant Discount Rate (MDR) on large payments is to ensure the digital payment ecosystem does not remain dependent on taxpayers' money. The official clarified that the government has not provided any new subsidies for approximately the last year and a half. The government was firmly opposed to subsidizing payments made to large merchants using the hard-earned money of taxpayers.

**Funds Were Steadily Declining**

A look at government data from recent years reveals that the government was gradually withdrawing its support. In the 2023-24 fiscal year, ₹3,631 crore was distributed to banks as UPI incentives. However, in the 2024-25 fiscal year, this figure dropped sharply to just ₹1,046 crore. This significant decline in funding clearly signaled that the government might soon discontinue the incentive scheme entirely. The prospect of generating revenue through MDR has further accelerated this process.

**Why the Government Launched the Subsidy Scheme**

The government had made a major strategic move to promote digital payments across the country. In January 2020, the MDR on UPI and RuPay debit card payments was reduced to zero. The government introduced the subsidy scheme to compensate banks for the losses incurred due to this zero-MDR policy. The primary aim was to encourage small shopkeepers to adopt digital payments. Additionally, the government sought to establish a secure payment infrastructure extending from Tier-2 and Tier-3 cities to rural areas. Now that this objective has largely been achieved and a clear path for banks to generate their own revenue has opened up, the government has decided to permanently discontinue the subsidy.

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