Retailers Body Warns UPI Fee Risks Pushing India Back To A Cash Economy

The state gets a traceable transaction from every UPI payment." Retailers ask why they're the ones paying for it

September 16, 2026

RAI warns that a new 0.4% MDR on UPI merchant transactions above Rs 2,000, effective October 15, could push small retailers back toward cash just as the festive season begins

Transactions above Rs 2,000 make up around 65% of UPI’s total value, meaning the fee lands on payments merchants depend on most

The Retailers Association of India (RAI) has warned that the government’s newly announced 0.4% Merchant Discount Rate (MDR) on UPI transactions above Rs 2,000 could push small retailers back toward cash, undoing years of progress in digital payment adoption just as the festive season gets underway. The fee, effective October 15, applies to Person-to-Merchant (P2M) UPI transactions above the threshold and is capped at Rs 300 for transactions of Rs 75,000 and above. Person-to-person transfers and payments up to Rs 2,000 remain untouched.

Why Retailers Are Worried

RAI CEO Kumar Rajagopalan put the concern bluntly: small merchants will now think twice about whether to accept cash or UPI, and during the festive season, when a large share of transactions cross the Rs 2,000 mark, a fee on digital payments makes cash the easier option. The math backs the concern up — transactions above Rs 2,000 account for roughly 65% of total UPI value, even though they’re a small share of transaction volume, meaning the fee lands squarely on the payments merchants actually rely on for revenue. For a retailer processing Rs 1 lakh in transactions, the added cost works out to around Rs 400 — a meaningful hit for businesses typically operating on 5-10% margins.

The Formalisation Argument

RAI’s sharper argument is about what a shift to cash could undo. Rajagopalan argued the move cuts against the government’s own formalisation push — UPI acceptance should be encouraged, not taxed, since every UPI payment gives the state a formal, traceable transaction it can tax, while cash leaves no such trail. RAI also questioned why bank-to-bank UPI transactions linked directly to savings or current accounts should carry the same fee as credit-linked ones, arguing a fee is easier to justify only where the underlying transaction resembles a credit product. The association’s broader position: since the National Payments Corporation of India (NPCI) keeps the UPI infrastructure running for the entire country, that cost should be underwritten by the RBI or the government, not passed down to the smallest retailer in the chain.

Other Trade Bodies Echo The Concern

RAI isn’t alone. The Clothing Manufacturers Association of India (CMAI) said introducing the MDR right at the start of the festive season is particularly difficult timing for an industry still working to revive demand and margins. Petrol dealers have gone further, seeking a full exemption — the fuel dealers’ body noted that dealer commissions haven’t been revised since October 2017, even as costs have steadily risen, and warned that even a flat Rs 5 charge per transaction would multiply into a significant burden given the sheer volume of transactions petrol pumps process daily.

What Happens Next

RAI said it plans to take the matter up directly with the NPCI and the Ministry of Finance, pushing for a graded fee structure that separates debit-linked from credit-linked UPI transactions, paired with incentives that keep small retailers inside the formal payment system rather than nudging them out of it. The government, for its part, has maintained that the MDR is not a tax and does not fall on consumers.

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