The Indian government has proposed a significant overhaul of the country’s digital payments framework by paving the way for the return of Merchant Discount Rate (MDR) on UPI and RuPay debit card transactions for large merchants. The proposal is part of the draft Payment and Settlement Systems Bill, 2026, which seeks to remove the statutory provision that currently mandates zero MDR on these payment modes. If enacted, banks and payment service providers would be allowed to levy MDR on large merchants, while smaller businesses would continue to receive government support for accepting digital payments.
The move comes after years of concerns from banks, fintech companies, and payment processors that the zero-MDR regime has made India’s rapidly expanding digital payments ecosystem financially unsustainable. Industry stakeholders argue that maintaining UPI infrastructure, cybersecurity systems, fraud prevention, and payment networks requires substantial investment, and allowing MDR for large merchants could create a more viable revenue model without affecting small businesses.
Government Proposes Removing Mandatory Zero MDR
The draft legislation proposes deleting the legal provision that prohibits charging MDR on UPI and RuPay debit card transactions.
If Parliament approves the Bill:
- Banks and payment service providers could charge MDR on eligible UPI and RuPay debit card transactions.
- The government would determine which categories of merchants are subject to MDR through future rules.
- Small merchants are expected to remain protected under the existing incentive framework.
Proposal Snapshot
| Item | Details |
|---|---|
| Proposed Law | Payment and Settlement Systems Bill, 2026 |
| Payment Modes | UPI and RuPay debit cards |
| Key Change | Removes statutory ban on MDR |
| Likely Impact | MDR may return for large merchants |
| Small Merchants | Expected to continue receiving protection |
Why the Government Is Considering the Change
The proposal follows repeated requests from banks, payment companies, and industry associations.
Key reasons include:
- Rising costs of maintaining payment infrastructure.
- Growing cybersecurity and fraud prevention expenses.
- Lack of a sustainable revenue model under zero MDR.
- Rapid growth in digital payment volumes requiring continued investment.
The Parliamentary Standing Committee on Finance has also highlighted concerns that the current zero-MDR policy places the entire cost of digital payment infrastructure on banks and payment service providers.
Who Could Be Affected?
The change could reshape revenue models across the ecosystem, much like how RuPay credit cards on UPI have opened a new revenue stream for banks and fintechs.
The proposal primarily targets large merchants, not everyday consumers.
Under the government’s existing digital payment incentive scheme:
- Small merchants continue to receive support for accepting UPI and RuPay debit card payments.
- Large merchants are not covered by the incentive programme, making them the likely candidates for MDR if the proposal becomes law.
Potential Impact
| Stakeholder | Likely Effect |
|---|---|
| Consumers | No direct fee proposed on UPI payments |
| Small Merchants | Expected to remain exempt from MDR |
| Large Merchants | May pay MDR on UPI and RuPay debit transactions |
| Banks & Fintech Firms | New revenue stream to support infrastructure investments |
What Is Merchant Discount Rate (MDR)?
Merchant Discount Rate is a fee paid by merchants to banks and payment service providers for processing digital transactions.
Typically, MDR helps cover:
- Payment gateway services.
- Bank processing costs.
- Fraud prevention.
- Network infrastructure.
- Settlement and operational expenses.
Importantly, MDR is generally charged to the merchant, not the customer, although businesses may indirectly factor such costs into pricing decisions.
Industry Reaction
The proposal comes alongside other legislative moves in Parliament, including when the Lok Sabha passed the MSME Amendment Bill to speed up supplier payments.
Banks and fintech companies have broadly welcomed the proposal, arguing that India’s digital payments ecosystem has matured to a point where sustainable commercial models are necessary.
Industry executives say allowing MDR for large merchants would:
- Improve long-term investment in UPI infrastructure.
- Strengthen cybersecurity capabilities.
- Encourage innovation in digital payments.
- Reduce dependence on government incentive payouts.
At the same time, merchant associations are expected to scrutinize the proposal closely, as any additional transaction cost could affect large retailers and e-commerce businesses.
Looking Ahead
The proposed amendments to the Payment and Settlement Systems Bill, 2026 mark one of the most significant policy shifts in India’s digital payments landscape since UPI’s rapid adoption. By removing the statutory prohibition on Merchant Discount Rate for UPI and RuPay debit card transactions, the government is seeking to balance the continued expansion of digital payments with the financial sustainability of banks, fintech firms, and payment infrastructure providers. The proposal also attempts to preserve support for small merchants while allowing cost recovery from larger businesses that process high transaction volumes.
Looking ahead, the final shape of the legislation and the accompanying rules will determine which merchants become subject to MDR and how the charges are structured. If implemented, the reform could provide a long-term revenue model for India’s digital payments ecosystem while ensuring that UPI continues to scale securely and efficiently without placing the entire cost burden on financial institutions and payment service providers.
Frequently Asked Questions
What does the new payment bill propose?
The draft Payment and Settlement Systems Bill, 2026 proposes removing the statutory provision that currently mandates zero MDR on UPI and RuPay debit card transactions, paving the way for banks to charge MDR on large merchants.
Would MDR apply to all merchants under the new bill?
No. MDR would apply mainly to large merchants, while smaller businesses would continue to receive government support for accepting digital payments.
What is Merchant Discount Rate (MDR)?
MDR is the fee that banks and payment service providers charge merchants for processing digital payment transactions.
Get the day’s top stories in your inbox
One concise email. No spam, unsubscribe anytime.
