New Delhi: The Central Government is likely to introduce significant changes to the zero-Merchant Discount Rate (MDR) regime for digital payments, potentially paving the way for the return of merchant charges on select transactions. The proposed overhaul will be carried out through amendments to the Payment and Settlement Systems Act and the Income Tax Act, signalling a shift in how digital payment costs are regulated in the country.

At present, merchants are not charged MDR on transactions conducted via widely used platforms such as Unified Payments Interface and RuPay debit cards. This zero-MDR policy has played a crucial role in driving the adoption of digital payments across India, especially among small and medium enterprises.

Shift to a notification-based framework

Under the proposed amendments, the current blanket exemption on MDR will be replaced with a notification-based mechanism. This means that instead of a universal zero-MDR policy, the Centre will have the authority to specify which digital payment modes will continue to enjoy exemption from merchant charges.

The revised framework narrows the statutory protection currently available to all eligible digital payment modes. Once implemented, only those payment instruments explicitly notified by the government will remain exempt from MDR. All other digital payment methods may become subject to merchant charges.

Importantly, the proposed Bill does not directly impose MDR on any specific payment system. However, it creates the legal foundation for introducing such charges in the future by limiting the scope of automatic exemptions.

Greater flexibility for policymakers

The move is expected to provide the government with greater flexibility in managing the digital payments ecosystem. By adopting a notification-based approach, policymakers can periodically review and update the list of exempted payment modes based on market conditions, technological developments and policy priorities.

Officials indicate that this flexibility will allow the framework to evolve alongside the rapidly changing digital payments landscape. It may also help address concerns raised by payment service providers and banks regarding the sustainability of the zero-MDR model, which has often been criticised for limiting revenue streams.

The proposed changes are also likely to be aligned with broader financial and digital inclusion goals, ensuring that essential payment systems continue to remain accessible and affordable.

Role of RBI in implementation

Once the amendments are passed by Parliament and brought into force, the detailed operational framework will be issued through official notifications. These rules will be finalised in consultation with the Reserve Bank of India, which regulates payment systems in the country.

The forthcoming guidelines are expected to clearly specify:

  • Which digital payment modes will retain zero-MDR status
  • The categories of transactions that may attract MDR
  • Compliance requirements for banks and payment service providers

This collaborative approach aims to ensure regulatory clarity while maintaining stability in the financial system.

Impact on merchants and consumers

If implemented, the revised regime could have a direct impact on merchants, particularly small businesses that rely heavily on digital payments. The introduction of MDR on certain payment modes may increase transaction costs, potentially influencing pricing strategies or payment preferences.

For consumers, the changes may not result in direct charges, as MDR is typically borne by merchants. However, there could be indirect effects if businesses choose to pass on additional costs.

At the same time, experts note that a calibrated approach—where essential platforms like UPI continue to remain exempt—could balance affordability with the need to sustain payment infrastructure.

Conclusion

The Centre’s proposed amendments mark a pivotal shift in India’s digital payments policy. By moving from a universal zero-MDR regime to a flexible, notification-based system, the government aims to create a more adaptable and sustainable framework. While the final impact will depend on the notified rules, the move signals a potential return of merchant charges on select digital transactions, reshaping the economics of India’s fast-growing digital payments ecosystem.