Why In News?

The Central Government has formally barred banks and payment aggregators from levying convenience or processing charges on UPI payments up to ₹2,000.

What is UPI?

Full Form

Unified Payments Interface (UPI)

Launched By

National Payments Corporation of India (NPCI) in 2016, under the guidance of RBI.

Nature

An advanced real‑time payment architecture enabling instant fund transfers between bank accounts via mobile devices.

Core Function

Facilitates 24×7 instant bank‑to‑bank payments using Immediate Payment Service (IMPS) rails.

Operation

Regulated under the Payment and Settlement Systems Act, 2007; managed by NPCI, an umbrella entity set up by RBI.

Technology

Works through Virtual Payment Addresses (VPAs), QR codes, and mobile apps — eliminating the need for account numbers or IFSC codes.

Interoperability

Operates seamlessly across all participating banks, payment banks, and third‑party apps (TPAPs) like PhonePe, Google Pay, Paytm, etc.

Security

Uses two‑factor authentication and end‑to‑end encryption, ensuring safe digital transactions.

Internationalization: NPCI International Payments Limited (NIPL) linked UPI with international networks like Singapore's PayNow, UAE's Ani, and Mauritius's instant payment systems to facilitate seamless cross-border peer-to-peer (P2P) and peer-to-merchant (P2M) remittances.

Offline Access: UPI Lite (on‑device wallet for ₹ 500 offline payments) and UPI 123Pay (IVR‑based payments for feature‑phones) bridge the digital divide.

Zero‑Charge Mandate (2026): Government barred banks and payment aggregators from levying fees on UPI transactions up to ₹ 2,000, encouraging micro‑value adoption.

  • Small-value UPI payments power everyday micro-purchases, drive financial inclusion for small vendors, and remain completely free of direct or indirect fees under national policy guidelines.

Why Are No Charges on Small‑Value UPI Payments Important?

  • Lower Transaction Cost: Protects consumers and micro‑retailers under the Zero‑MDR (Merchant Discount Rate) mandate of the Payment and Settlement Systems Act, 2007.

  • Greater Digital Adoption: Prevents merchants from reverting to cash; sustains growth beyond 15 billion monthly transactions (RBI 2026 report).

  • Reduced Cash Dependence: Cuts physical currency management costs, estimated at ≈ 1.5 % of GDP (RBI Annual Report).

  • Merchant Convenience: Enables instant audio‑visual confirmations via IoT soundboxes, reducing reconciliation delays.

  • Financial Inclusion: Connects unbanked citizens under Pradhan Mantri Jan Dhan Yojana (PMJDY) to formal banking channels.

  • Formalisation of Transactions: Creates digital paper trails for small retail sales, improving GST compliance and municipal tax mapping.

  • Digital Economy Growth: Strengthens Digital Public Infrastructure (DPI) and fosters innovation in embedded micro‑credit systems.

Source: INDIANEXPRESS

PRACTICE QUESTION

Q. With reference to the Unified Payments Interface (UPI) in India, consider the following statements:

1. UPI is owned and operated by the National Payments Corporation of India (NPCI), an initiative of the RBI and Indian Banks' Association.

2. The Merchant Discount Rate (MDR) on small-value peer-to-merchant UPI transactions is statutorily capped at 2.5% by the Ministry of Finance.

3. UPI Lite allows users to execute small-value offline transactions using an on-device balance without utilizing an active internet connection or UPI PIN.

Which of the statements given above are correct?

A) 1 and 2 only

B) 1 and 3 only

C) 2 and 3 only

D) 1, 2, and 3

Answer: B

Explanation:

Statement 1 is correct: UPI is owned and operated by the National Payments Corporation of India (NPCI), which was set up as an initiative of the Reserve Bank of India (RBI) and the Indian Banks' Association (IBA).  

Statement 2 is incorrect: The Merchant Discount Rate (MDR) on UPI transactions is zero, not 2.5%. The government announced a zero-charges framework for UPI transactions to boost digital payments.

Statement 3 is correct: UPI Lite enables users to make small-value offline transactions (up to a specific per-transaction limit) using an on-device wallet balance without requiring an active internet connection or a UPI PIN.