New Delhi: The era of completely free Unified Payments Interface (UPI) transactions could be headed for a policy shift, with the Centre proposing amendments that would enable the introduction of a Merchant Discount Rate (MDR) on select UPI payments in the future.
The proposal is part of amendments to the Payment and Settlement Systems Act, introduced in Parliament by Finance Minister Nirmala Sitharaman through the Payment and Settlement Systems (Amendment) Bill and the Taxation and Other Laws (Amendment) Bill.
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The proposed legislation does not immediately impose any charge on UPI transactions. Instead, it provides the government with the legal authority to notify merchant fees on specified digital payment modes at a later stage, if considered necessary.
Who could be affected?
According to reports, one of the proposals under consideration is to levy an MDR of 0.3% to 0.5% on UPI transactions exceeding Rs 2,000, applicable only to merchants with an annual turnover of more than Rs 1.5 crore.
This means the proposed fee, if eventually notified, would be borne by eligible merchants and not by individual consumers. Small businesses and neighbourhood retailers are expected to remain outside the ambit of the proposal.
Policymakers are also examining an alternative model under which the MDR may be linked to a merchant’s annual turnover instead of the value of individual transactions. A cap on the maximum fee may also be prescribed.
No immediate impact on consumers
Officials have clarified that the amendment merely creates a legal framework and does not introduce any immediate charges. Customers using UPI for routine personal payments such as grocery shopping, taxi fares or utility bills will continue to make transactions free of cost unless a separate government notification is issued in the future.
Industry experts also believe that even if MDR is introduced, it would largely apply to high-value commercial transactions rather than day-to-day retail payments.
Payment service providers and banks have long maintained that the zero-MDR regime has made it difficult to sustain investments in digital payment infrastructure.
Unlike credit and debit card transactions, which already attract merchant discount rates, UPI transactions currently generate no processing revenue for payment companies. Industry stakeholders argue that a modest MDR on high-value transactions would help strengthen payment infrastructure, improve cybersecurity and support continued innovation in India’s rapidly expanding digital payments ecosystem.
Only a small fraction of transactions may be covered
Official estimates suggest that transactions above ₹2,000 account for only about 5% of the total number of UPI transactions, but contribute nearly 65% of the overall transaction value.
This indicates that any future MDR would affect only a limited segment of high-value commercial transactions, while the overwhelming majority of UPI users are likely to remain unaffected.
UPI continues to dominate digital payments
UPI remains the world’s largest real-time digital payment platform, processing around 23.7 billion transactions worth nearly ₹29.9 lakh crore in a single month, underscoring its pivotal role in India’s digital economy.
While the proposed amendment has sparked discussion among businesses and payment service providers, any decision to introduce merchant charges will depend on future government notifications after the legislation comes into force.
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