New Delhi: The Central government is considering allowing a Merchant Discount Rate (MDR) on select Unified Payments Interface (UPI) transactions above ₹2,000, marking a significant shift from the zero-MDR regime introduced in 2020. The proposal, however, is expected to apply only to merchant payments and not to person-to-person (P2P) UPI transfers, ensuring that consumers sending money to family and friends continue to enjoy free transactions.
The move is aimed at creating a sustainable revenue model for banks and payment service providers, which have long argued that maintaining a completely free UPI ecosystem has become financially challenging as transaction volumes continue to surge.
What is being proposed?
According to reports, the government may permit an MDR of 0.25% to 0.4% on UPI payments exceeding ₹2,000 made to businesses.
The proposal would not apply to person-to-person transfers, meaning individual users transferring money to one another would continue to pay no charges. Instead, the MDR would be borne by merchants accepting digital payments.
Why the government is considering MDR
Since January 2020, UPI transactions have operated under a zero-MDR framework, preventing banks and payment companies from charging merchants for processing digital payments.
While the policy significantly accelerated UPI adoption, payment companies and banks have argued that the absence of MDR has limited their ability to recover costs associated with maintaining payment infrastructure, cybersecurity, fraud prevention and technology upgrades.
Legal amendment opens the door
The proposal follows amendments introduced to the Payment and Settlement Systems Act, which would provide the legal framework for the government to notify MDR on digital payment transactions in the future.
The amendment itself does not immediately impose charges but gives the government the flexibility to introduce them through future notifications if required.
Large merchants likely to be affected first
Reports suggest that the government is considering limiting MDR primarily to large merchants and higher-value transactions.
One proposal under discussion is to levy the fee only on merchant payments above ₹2,000, while keeping small businesses and low-value transactions exempt to ensure digital payment adoption remains unaffected among smaller retailers.
Consumers unlikely to pay directly
Experts note that MDR is traditionally paid by merchants rather than customers.
However, businesses could choose to absorb the additional cost or pass part of it on through product pricing. No final decision has been announced regarding implementation or whether specific merchant categories would receive exemptions.
Digital payment ecosystem seeks sustainability
India’s UPI network has witnessed extraordinary growth, recording record transaction volumes and values in recent months.
Industry stakeholders have repeatedly argued that introducing a limited MDR for large merchant transactions would help ensure the long-term sustainability of the country’s digital payments infrastructure while keeping everyday consumer transactions free.
No final decision yet
The government has not yet finalised the fee structure or implementation timeline.
Officials are expected to consult stakeholders before notifying any MDR framework, and the final policy could differ from the proposals currently under consideration. Until then, UPI transactions continue under the existing zero-MDR regime.
Conclusion
The government’s proposal to allow MDR on merchant UPI payments above ₹2,000 represents a major policy shift aimed at balancing the rapid growth of digital payments with the financial sustainability of banks and payment service providers. While ordinary users are expected to continue enjoying free person-to-person UPI transfers, the final contours of the merchant fee framework will depend on future government notifications and stakeholder consultations.