The Union Ministry of Finance has proposed amendments to the Payment and Settlement Systems Act, 2007, that could allow the reintroduction of Merchant Discount Rates (MDR) on UPI transactions. The move is aimed at supporting the next phase of growth of India’s digital payment ecosystem.
The proposed changes could remove the current zero MDR provision under Section 10A, which prevents banks and payment service providers from charging fees for online payment transactions.
What Is MDR and How Does It Work?
Merchant Discount Rate (MDR) is a fee paid by businesses to banks and payment service providers for processing digital payments. The fee is regulated by the Reserve Bank of India (RBI).
Since 2020, MDR on UPI and RuPay debit card transactions has been kept at zero to encourage digital payments and increase adoption among customers and merchants.
Currently, when a customer makes a UPI payment, merchants receive the full transaction amount without any processing fee deduction. If MDR is introduced, a small fee could be charged to merchants for processing certain transactions.
Will UPI Users Have To Pay Extra Charges?
The proposed amendment does not mention charging customers for using UPI. Any MDR introduced is expected to apply to merchants rather than consumers.
The government will decide the applicable rates and the types of transactions where MDR may be introduced after the amendment process is completed.
For UPI users, this means there may not be any direct impact or additional transaction charges while making digital payments.
Why Is The Government Considering MDR On UPI?
UPI has become the backbone of India’s digital payment system, accounting for nearly 88% of digital transactions in the country. Banks and payment service providers process billions of UPI transactions every month, requiring continuous investment in technology, security and infrastructure.
A Parliamentary Standing Committee on Finance report highlighted that maintaining a zero MDR system could create long-term financial challenges as UPI continues to expand and attract more users.
With expectations of hundreds of millions of new users and a significant rise in monthly transactions, the government is looking for ways to ensure the financial sustainability of the UPI ecosystem.
Industry Push For MDR Reconsideration
The Payments Council of India (PCI), representing digital payment companies, has previously urged the government to reconsider the zero MDR policy.
The industry body has raised concerns that the existing system does not fully cover the operational costs involved in running and expanding digital payment infrastructure. It suggested introducing MDR for certain categories, including large merchants, while keeping small users and businesses protected.
The proposed move aims to balance two priorities: keeping UPI affordable for users while ensuring the digital payment network remains sustainable as it grows.
