Centre Considers 0.25%–0.35% UPI Transaction Charges for Large Merchants

The Central government is considering introducing a merchant discount rate (MDR) of 0.25% to 0.35% on high-value Unified Payments Interface (UPI) transactions — a move that would bring back UPI transaction charges for the first time since the zero-fee regime began in 2020. The proposal is aimed at creating a sustainable revenue model for banks and fintech companies that bear the costs of processing billions of UPI payments without earning transaction fees. Importantly, the proposed charges would apply to merchants—not consumers—and no final decision has been taken.

The proposal follows amendments to the Payment and Settlement Systems Act introduced in Parliament, which would provide the legal framework for reintroducing MDR on selected digital payment modes. Policymakers are exploring multiple models, including charging fees only on high-value UPI transactions or limiting them to large merchants, while keeping payments free for consumers and small businesses. The groundwork was laid by the new payment bill that may allow banks to charge MDR on UPI and RuPay payments.

Government Considers MDR on High-Value UPI Transactions

According to reports, the government is evaluating:

• A 0.25%–0.35% merchant discount rate (MDR) on high-value UPI payments.
• Applicability primarily to large merchants.
• Exemptions for consumers and smaller businesses.
• A framework that ensures long-term sustainability of India’s digital payments ecosystem.

Proposal Snapshot

Item	Details
Proposed MDR	0.25%–0.35%
Applies To	High-value UPI merchant transactions (under discussion)
Consumers	No direct charges proposed
Small Merchants	Likely to remain exempt
Status	Under government consideration

Why the Government Is Considering the Move

Since January 2020, merchant payments made through UPI have carried zero MDR, meaning payment service providers, banks, and fintech firms do not earn transaction fees despite processing massive payment volumes.

Industry participants argue that:

• Maintaining payment infrastructure is increasingly expensive.
• Investments in cybersecurity and fraud prevention continue to rise.
• Banks and fintech firms need sustainable revenue to support future innovation.
• Government incentive payments alone may not be sufficient as UPI scales further.

The proposed policy seeks to balance continued UPI adoption with the financial viability of the ecosystem.

Two Models Under Discussion

Officials are evaluating multiple approaches before taking a final decision.

Possible options include:

• Charging MDR only on transactions above a specified value threshold.
• Applying fees only to merchants above a certain annual turnover.
• Keeping person-to-person (P2P) payments free.
• Protecting small businesses from additional payment costs.

One proposal reportedly under consideration would levy 0.3%–0.5% MDR on transactions above ₹2,000 for merchants with annual turnover exceeding ₹1.5 crore, though no proposal has been finalized.

Possible Structure

Stakeholder	Likely Impact
Consumers	No direct UPI fee
Small Merchants	Likely exempt
Large Merchants	May pay MDR on eligible transactions
Banks & Fintechs	Additional revenue to support infrastructure

Why High-Value Transactions Matter

Although large-value merchant payments represent only a small share of UPI transaction volumes, they account for a significant portion of the total value processed.

According to estimates cited by Jefferies:

• Transactions above ₹2,000 account for roughly 4% of merchant payment volumes.
• However, they contribute around 67% of total merchant payment value.

Because of this concentration, charging MDR only on larger transactions could generate substantial revenue while affecting relatively few transactions by volume.

Potential Impact on the Payments Industry

Analysts believe a limited MDR could:

• Improve profitability for payment service providers.
• Support continued investment in payment infrastructure.
• Reduce dependence on government subsidies.
• Strengthen long-term sustainability of UPI.

Jefferies estimates such a model could create an annual revenue pool of ₹5,000–10,000 crore for the payments industry, benefiting companies including Paytm, Pine Labs, banks, and payment processors. Listed payment firms have been inching towards profitability without MDR income — MobiKwik posted its third consecutive profitable quarter with a ₹7.6 crore Q1 profit — so a fresh fee pool would materially change the sector’s unit economics.

No Final Decision Yet

Government officials have emphasized that the legislative amendment merely creates the legal framework for charging MDR in the future.

Key points include:

• No MDR has been approved yet.
• The fee structure is still under discussion.
• Consumer UPI payments are expected to remain free.
• Final implementation, if approved, would require separate government notification.

Looking Ahead

The proposal to introduce a 0.25%–0.35% merchant discount rate on high-value UPI transactions reflects the government’s effort to make India’s rapidly expanding digital payments ecosystem financially sustainable without disrupting consumer adoption. By focusing on larger merchants and higher-value transactions, policymakers aim to generate revenue for banks and fintech companies while preserving the zero-cost experience that has driven UPI’s widespread success. At present, however, the proposal remains under consideration, and no final fee structure has been approved.

Looking ahead, the government’s final decision will be closely watched by banks, fintech firms, merchants, and digital payment providers. If implemented, the new MDR framework could reshape the economics of UPI by creating a sustainable revenue stream for payment infrastructure while seeking to protect consumers and small businesses from additional transaction costs.

Frequently Asked Questions

What are UPI transaction charges?

UPI transaction charges refer to the merchant discount rate (MDR) — a percentage fee deducted from a merchant’s payment and shared among banks, payment service providers, and the payment network. Since January 2020, MDR on UPI merchant payments in India has been set at zero. The Centre is now considering a 0.25%–0.35% MDR on high-value merchant transactions, though nothing has been approved yet.

Who will pay the UPI transaction charges?

Under the proposals currently being discussed, the fee would be borne by merchants — and primarily large merchants above a turnover threshold. Consumers making UPI payments and person-to-person (P2P) transfers are expected to remain free of charge, and small businesses are likely to stay exempt.

Will UPI transaction charges apply above ₹2,000?

One model reportedly under consideration would apply a 0.3%–0.5% MDR to merchant transactions above ₹2,000 where the merchant’s annual turnover exceeds ₹1.5 crore. That threshold is significant because payments above ₹2,000 make up only about 4% of merchant transaction volume but roughly 67% of the value. However, no threshold has been finalized, and any final structure would need a separate government notification.