Centre weighs MDR return on large UPI merchant transactions

MUMBAI: India’s favourite payment beep may soon come with a new business bill but not for shoppers. The Centre is considering reintroducing the merchant discount rate (MDR) on select Unified Payments Interface (UPI) transactions, signalling a potential policy shift as it looks to make the country’s fast-growing digital payments ecosystem financially sustainable.

According to a Moneycontrol report, the government is evaluating a proposal to levy an MDR of less than 0.5 per cent on UPI transactions above Rs 2,000 made to large merchants. A decision is expected within the next two weeks.

Officials have clarified that consumers will continue to make UPI payments free of charge. The proposed MDR, if approved, would be borne by eligible merchants and businesses rather than individual users.

The move reflects growing concerns over the long-term economics of India’s digital payments infrastructure. Banks and payment ecosystem participants have continued to shoulder the cost of building and maintaining the systems powering the country’s rapidly expanding UPI network, even as transaction volumes continue to surge.

At present, the government offsets part of these costs through the ‘Incentive Scheme for Promotion of RuPay Debit Cards and Low-Value BHIM-UPI Transactions’, introduced in FY22. The scheme compensates banks and payment system operators for UPI transactions of up to Rs 2,000, with the government allocating Rs 2,000 crore for the current financial year.

The proposal has also found support from the Parliamentary Standing Committee on Finance. In its report dated March 12, 2026, the committee observed that while the zero-MDR policy played a crucial role in making digital payments affordable and accelerating adoption, it has also created financial pressures across the UPI ecosystem.

The committee projected that UPI could add another 600 million users and process between 100 billion and 150 billion transactions every month over the next five to seven years. However, it cautioned that supporting growth at that scale would require significant investments in infrastructure, cybersecurity and merchant onboarding investments that may prove difficult under the current zero-fee model.

According to separate reports, the proposal under consideration could apply only to large merchants with an annual turnover of around Rs 1 crore to Rs 1.5 crore. Person-to-person transfers, small merchants and low-value UPI payments are expected to remain outside the proposed framework if it receives final approval.

Before January 2020, merchants accepting UPI payments paid an MDR, with the National Payments Corporation of India (NPCI) capping the fee at around 0.30 per cent per transaction. The government subsequently abolished MDR on UPI and RuPay debit card transactions to accelerate digital payment adoption and expand financial inclusion.

If the proposal is approved, it would mark the first significant rethink of the zero-MDR regime, balancing the government’s push for free and accessible digital payments with the growing need to ensure the ecosystem remains commercially viable as UPI continues its rapid expansion.