The Indian government is considering a major change to the way the country’s Unified Payments Interface (UPI) ecosystem is funded, with the Finance Ministry examining options to reduce its reliance on subsidies and potentially restore the Merchant Discount Rate (MDR) for selected high-value transactions or merchants. The move comes as the cost of operating India’s rapidly expanding digital payments infrastructure has grown far beyond the government’s current financial support.
The Department of Financial Services is evaluating two possible approaches: introducing MDR for certain high-threshold merchant transactions or creating a tiered incentive structure that would gradually reduce government support over the next few years. Importantly, the government has indicated that any future MDR would be limited to selected merchant transactions, while consumers would continue to be able to make UPI payments without a transaction fee.
Government Considers Two Models for UPI Funding
The Finance Ministry told the Parliamentary Standing Committee on Finance that it is examining two potential ways to make the UPI ecosystem more financially sustainable.
The first option is to restore MDR for certain high-value transactions or merchants. The second is a tiered incentive system under which government support would gradually decline over the coming years.
Neither option has been finalized yet.
Proposed UPI Funding Models
| Model | How It Could Work |
|---|---|
| Selective MDR | Fees applied to certain high-value merchant transactions |
| Tiered Incentives | Government support gradually reduced over several years |
| Consumer Payments | Expected to remain free |
| Small Merchants | Government has indicated they would remain protected |
The government is seeking a model that can support payment companies and banks without undermining UPI’s widespread adoption.
₹2,000 Crore Subsidy Versus ₹20,700 Crore Cost
The scale of the funding gap is one of the main reasons behind the government’s review.
The parliamentary committee noted that the government’s current budgetary allocation for incentivising UPI transactions and compensating the industry for zero MDR is ₹2,000 crore. In comparison, the industry’s estimated operational cost is around ₹20,700 crore.
That means the existing allocation covers only a fraction of the cost of maintaining the ecosystem.
UPI Funding Gap
| Metric | Amount |
|---|---|
| Government allocation | ₹2,000 crore |
| Estimated industry operational cost | ₹20,700 crore |
| Coverage of estimated cost | About 11% |
The parliamentary panel warned that continued dependence on insufficient subsidies could eventually affect investments in areas such as cybersecurity, fraud prevention and payment infrastructure.
Why Zero MDR Was Introduced
MDR is the fee associated with processing a digital payment that is generally paid by the merchant to participants in the payment ecosystem.
Before the current zero-MDR regime, UPI merchant transactions could attract MDR of up to 0.30% of the transaction value.
The Centre introduced zero MDR across UPI transactions in January 2020 to accelerate digital-payment adoption and encourage consumers and businesses to move away from cash.
The policy helped make UPI one of the world’s most widely used real-time payment systems, but it also removed a major potential source of revenue for banks and payment service providers.
UPI Could See a More Targeted Fee Structure
The government’s current approach suggests it does not intend to introduce a blanket charge across UPI.
Instead, policymakers are considering a targeted system focused on larger commercial transactions.
The government has indicated that:
- Consumers would continue to make UPI payments without transaction charges.
- Person-to-person payments are expected to remain outside the proposed MDR framework.
- Only selected merchant transactions could attract MDR.
- Any applicable rate would be nominal and below typical debit or credit card charges.
- Small merchants are expected to receive protection.
The exact transaction threshold and MDR rate have not yet been finalized.
Parliament Has Created a Legal Path for MDR
The potential change became possible after Parliament passed the Taxation and Other Laws (Amendment) Bill, 2026.
The legislation amended the Payment and Settlement Systems Act, 2007, giving the government the ability to specify through notification which electronic payment modes would continue to receive statutory protection from charges. However, the government has not yet notified an MDR regime for UPI.
The UPI and Services Steering Committee, headed by the National Payments Corporation of India (NPCI), will determine the structure of MDR and the threshold above which transactions could become subject to the fee.
Why the Government Wants a Sustainable Revenue Model
UPI’s rapid growth has created a paradox: transaction volumes continue to rise, but the infrastructure supporting those payments still needs to be financed.
Banks, payment companies and technology providers incur costs related to:
- Payment processing.
- Cybersecurity.
- Fraud detection.
- Network infrastructure.
- Customer support.
- Technology upgrades.
The parliamentary committee argued that a sustainable revenue mechanism is necessary to prevent the government from having to continually compensate the ecosystem through public funds.
What It Means for Consumers
For ordinary UPI users, the proposed changes are unlikely to immediately alter the payment experience.
The government has repeatedly emphasized that consumers will not be charged for making UPI payments under the proposed framework.
The potential MDR would instead apply to a limited category of merchant transactions above a high threshold.
This distinction is important because UPI’s popularity has been built partly around its simplicity and zero-cost consumer experience.
Impact on Banks and Fintech Companies
Banks and payment service providers could benefit if a new MDR system creates a more reliable source of revenue.
Under the current structure, companies processing enormous numbers of UPI transactions do not receive a conventional transaction fee from most payments and instead depend partly on government incentives and other financial services.
A targeted MDR could therefore provide additional revenue to support:
- Payment infrastructure.
- Fraud prevention.
- Cybersecurity.
- Product development.
- Higher transaction capacity.
However, the impact will depend heavily on the eventual MDR rate and which merchants and transactions are covered.
Looking Ahead
India’s UPI ecosystem is approaching an important transition as the government looks for a sustainable way to finance its continued expansion. With estimated industry operating costs of ₹20,700 crore against a government allocation of just ₹2,000 crore, policymakers face increasing pressure to develop a revenue model that reduces the burden on public finances without damaging UPI’s low-cost advantage. The two options now under consideration—selective MDR for high-value merchant transactions and a phased reduction in government incentives—represent attempts to balance those competing objectives.
Looking ahead, the key questions will be the transaction threshold, merchant categories, MDR rate and timing of implementation. The government has made clear that consumers are not expected to pay for UPI transactions, meaning the debate is primarily about how the financial burden is distributed among large merchants, banks, payment companies and the government. If carefully designed, a targeted MDR framework could give India’s digital-payment ecosystem a more sustainable financial foundation while preserving the free and frictionless UPI experience that drove its extraordinary growth.
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