The Central Government has proposed amendments to the Payment and Settlement Systems (PSS) Act that could pave the way for the return of Merchant Discount Rate (MDR) on select Unified Payments Interface (UPI) transactions. The proposal is aimed at creating a sustainable revenue model for banks and payment service providers while preserving free digital payments for most consumers.
What is MDR?
Merchant Discount Rate (MDR) is a fee that merchants pay to banks and payment service providers for processing digital transactions. It is usually calculated as a percentage of the transaction value.
Since January 2020, the government has maintained a zero-MDR policy for UPI and RuPay debit card transactions to encourage digital payments.
What Has the Government Proposed?
The proposed legal framework would allow MDR to be charged on selected UPI merchant transactions, rather than all UPI payments.
Key proposals under consideration include:
- Applying MDR only to high-value UPI transactions, with one proposal using a threshold of ₹2,000 and above.
- Limiting the charge to large merchants, while exempting small businesses.
- Capping the MDR at around 0.3% to 0.5% of the transaction value.
- Keeping person-to-person (P2P) UPI transfers free.
Will Consumers Have to Pay?
Based on the current proposal:
- No direct charge is expected for consumers making UPI payments.
- The MDR would be paid by eligible merchants, similar to how merchant fees work for many debit and credit card transactions.
- However, some merchants could choose to factor these costs into product or service pricing.
Why is the Government Considering MDR?
The move comes as banks and fintech companies have argued that maintaining UPI infrastructure—including technology upgrades, cybersecurity, fraud prevention, and payment processing—requires a sustainable source of revenue.
According to RBI Governor Sanjay Malhotra, digital payment systems involve infrastructure costs and “someone has to pay” for maintaining them.
Who Could Be Affected?
If implemented, the proposal is expected to affect:
- Large retail chains
- E-commerce platforms
- Businesses processing high-value UPI payments
The proposal is expected to leave small merchants and everyday users largely unaffected, ensuring that low-value digital payments remain accessible.
Current Status
The proposal is not yet law. It is part of amendments introduced to Parliament to provide the legal framework for charging MDR if the government decides to implement it.
The final scope—including the transaction threshold, merchant eligibility, and MDR rate—will be determined after the legislative process and subsequent policy decisions.
Key Takeaways
- The government has proposed enabling MDR on select UPI merchant payments.
- The proposal primarily targets large merchants and high-value transactions.
- Consumers are not expected to pay MDR directly, and P2P UPI transfers are expected to remain free.
- The objective is to make India’s rapidly growing digital payments ecosystem financially sustainable while continuing to promote digital adoption.