Government Proposes MDR on Select High-Value UPI Payments

Government Proposes MDR on Select High-Value UPI Payments

General Studies Paper III: Growth & Development, Government Policies & Interventions,

Why in News?

Recently the government proposed enabling Merchant Discount Rate (MDR) on select high-value UPI payments to strengthen digital payment sustainability.

Proposal of MDR on High-Value UPI Payments

Amendment: The Union Government has proposed amendments to the Payment and Settlement Systems (PSS) Act, 2007 to enable the reintroduction of Merchant Discount Rate (MDR) on select UPI merchant transactions.
- MDR is a transaction processing fee paid by a merchant to banks and payment service providers whenever a customer makes a digital payment.
- Customers are not directly charged under the proposed framework.
- The proposal does not automatically impose MDR but removes the statutory restriction that currently mandates zero MDR on notified digital payments.
Legal Change: The proposal seeks to amend Section 10A of the PSS Act, which presently prohibits MDR on notified electronic payment methods such as Unified Payments Interface (UPI) and RuPay debit cards.
- After the amendment, the Central Government will gain flexibility to notify where, when, and on whom MDR may apply through subsequent rules.
Coverage and Exemptions: The proposed framework is primarily aimed at large businesses, with reports indicating merchants having annual turnover above ₹50 crore may be covered.
- Annual turnover up to Rs 1.5 crore is expected to remain exempt.
- Small merchants and micro-enterprises are expected to continue enjoying the zero-MDR.
- The proposal targets high-value Person-to-Merchant (P2M) UPI payments.
  - It particularly targets transactions above ₹2,000 made to large merchants.
  - Person-to-Person (P2P) transfers and routine low-value UPI payments are expected to remain outside its scope.
Likely Structure: Government discussions indicate a low MDR, with reports suggesting 0.25%–0.40%.
- Earlier policy discussions also indicated it could remain below 0.5%.
- The exact rate will be notified separately after legislative approval.

MDR Policy Framework in India

Policy: Merchant Discount Rate (MDR), which is the fee paid by merchants to banks and payment service providers, covers the cost of payment processing, switching, settlement, fraud prevention, cybersecurity, and infrastructure maintenance.
- It is a transaction fee typically ranging from 1% to 3% of each sale. Specific rate depends directly on your total processing volume, average ticket size, and whether customers pay with debit or credit cards.
- While the Zero-MDR Policy legally prohibits banks and payment system providers from charging MDR on notified electronic payment modes.
Legal Basis: The policy is anchored in Section 10A of the Payment and Settlement Systems Act, 2007, read with Section 269SU of the Income-tax Act, 1961 and Rule 119AA.
- These provisions mandate specified businesses to provide prescribed digital payment modes.
- To accept card payments, merchants must set up a merchant account and agree to MDR.
- These fees are automatically deducted during transaction settlement and must be factored into business costs.
Institutions: The Reserve Bank of India (RBI) regulates payment systems under the PSS Act. Per RBI rules, merchants cannot pass MDR charges on to customers.
- NPCI develops and operates UPI infrastructure. Banks provide accounts and settlement services.
Applicability: It covers credit cards on UPI, Prepaid Payment Instruments (wallets) on UPI, or other payment instruments where separate interchange or commercial charges may apply.
- The statutory zero-MDR regime currently applies to bank account-based UPI Person-to-Merchant (P2M) transactions and RuPay debit card merchant payments.
- It does not automatically extend to all payment instruments routed through UPI.
Background: Before 2020, UPI Person-to-Merchant (P2M) transactions attracted MDR of up to 0.30%, while debit cards attracted regulated MDR.
- To accelerate Digital India, reduce cash usage, and promote formalisation, the government abolished MDR on specified digital payment modes from 1 January 2020 through statutory amendments.

Need for Such Proposal

India’s UPI ecosystem has achieved massive scale, but its commercial model remains largely non-remunerative.
- In July 2026, India’s UPI processed a record 23.66 billion transactions worth ₹29.9 lakh crore.
- Despite this massive scale, a March 2026 report from the Parliamentary Standing Committee on Finance warned that the lack of MDR threatens the long-term financial viability of the digital payments network.
Although transactions above ₹2,000 constitute only about 4% of total UPI transaction volume, they account for nearly 67% of the total transaction value.
The Government has repeatedly funded the payment ecosystem through incentive schemes. The incentive outlay increased from ₹1,389 crore (FY 2021-22) to ₹3,631 crore (FY 2023-24), demonstrating rising fiscal commitments.
Government incentives presently focus only on small merchants and UPI P2M transactions up to ₹2,000. High-value transactions and large merchants receive no incentive, indicating that public support is already intended to be selective.
UPI now connects over 720 live banks, making it one of the world’s largest interoperable payment networks.
- Continued expansion requires investment in settlement systems, interoperability, redundancy, and network resilience.
The Union Government’s Outcome Budget for 2026-27 targets a 25% increase in BHIM-UPI transactions and 10% growth in UPI acceptance infrastructure.
- Achieving these ambitious targets requires continuous investment by payment ecosystem participants.
A viable revenue stream can encourage banks and fintech firms to invest in AI-based fraud detection, cross-border UPI, offline payments, UPI Lite, and merchant-centric value-added services.
Market estimates suggest that a modest MDR on eligible transactions could generate ₹5,000–10,000 crore annually, creating a stable funding source for payment infrastructure without imposing charges on most retail users.
India has emerged as the global leader in real-time digital payments. Sustaining this leadership requires a payment ecosystem that is financially viable, technologically resilient, and institutionally self-sustaining, rather than relying indefinitely on government support.

What is Unified Payments Interface (UPI)?

About: Unified Payments Interface (UPI) is an instant, interoperable, real-time retail payment system.
- It was developed by National Payments Corporation of India (NPCI), an RBI-regulated entity.
- It was launched in April 2016 to enable seamless fund transfers directly between bank accounts.
- It is authorized under the Payment and Settlement Systems Act, 2007.
Objective: UPI was designed to create ‘One Nation, One Payment Interface’ by integrating multiple bank accounts onto a single platform.
- It aims to promote financial inclusion, and reduce dependence on cash.
- It aims to strengthen India’s Digital Public Infrastructure (DPI).
Technological Architecture: UPI is built on the Immediate Payment Service (IMPS) infrastructure.
- It uses Application Programming Interfaces (APIs) for interoperability, Virtual Payment Addresses (VPAs) for identity masking.
- It integrates Aadhaar Enabled Payment System (AePS) which allows basic banking services using Aadhaar authentication.
- It also uses two-factor authentication through device binding and UPI PIN for secure transaction authorization.
Institutional Ecosystem: The RBI regulates the payment system. NPCI owns and operates the UPI switch.
- Issuer banks debit customer accounts, acquirer banks receive merchant payments.
- Payment Service Providers (PSPs) and Third-Party Application Providers (TPAPs) provide customer-facing applications such as BHIM and other UPI-enabled apps.
Features: UPI supports Person-to-Person (P2P), Person-to-Merchant (P2M), and QR-code payments.
- It supports collecting requests, AutoPay mandates, IPO applications, recurring payments, credit on UPI, UPI Lite, UPI 123PAY, and cross-border UPI in selected partner countries.
- It incorporates end-to-end encryption, real-time transaction monitoring, device fingerprinting, and risk-based authentication.
- Users can link multiple bank accounts through one UPI-enabled app. Each user can create a unique UPI ID (like name@bank).
Performance: UPI has become the world’s largest real-time payment system.
- As of June 2026, it had 55.49 crore onboarded users. In FY 2025–26, it processed 24,162 crore transactions worth ₹314 lakh crore.
- UPI is internationally recognised as a successful Digital Public Infrastructure (DPI) model.
- It handles nearly 49% of the world’s real-time digital payment volume, driven by NPCI International Payments Limited (NIPL).
- India is expanding cross-border UPI connectivity through partnerships with foreign payment systems.
  - As of August 2026, UPI has established its operational footprint across 10 international countries
  - It is live and accepted in Bhutan, Singapore, the United Arab Emirates (UAE), Nepal, France, Mauritius, Sri Lanka, Qatar, Cambodia, and Greece.
Significance: UPI represents the convergence of FinTech, Digital India, and financial inclusion.
- It represents formalisation of the economy, cashless governance, and innovation in public digital infrastructure.

Frequently Asked Questions (FAQs):

1. What is Merchant Discount Rate (MDR)?

Answer: MDR is the fee merchants pay to banks and payment service providers for processing digital payment transactions.

2. Why did the Government propose MDR on high-value UPI payments?

Answer: To ensure financial sustainability of the digital payment ecosystem while keeping most low-value UPI transactions free.

3. What is the Zero-MDR policy in India?

Answer: It prohibits charging MDR on notified UPI and RuPay debit card merchant transactions.

4. Will customers pay MDR under the proposed UPI framework?

Answer: No. The proposal primarily envisages eligible merchants, not customers, bearing the MDR.

5. What is UPI and who developed it?

Answer: UPI is a real-time payment system developed by NPCI under the regulation of the RBI.

Disclaimer: Information in this article is based on official announcements and public records. Regulations and implementation details may evolve over time.