India’s proposed framework for reintroducing Merchant Discount Rate (MDR) on select Unified Payments Interface (UPI) transactions is likely to affect only a small fraction of merchant payments by volume, according to an analysis of 2025–26 transaction data. Estimates suggest that only around 4% of person-to-merchant (P2M) UPI transactions would attract MDR if the government adopts a proposal to levy charges only on transactions above ₹2,000 and for large merchants. Despite accounting for just 4% of transaction volume, these payments represent roughly two-thirds of the total value of merchant UPI transactions, making them a potentially significant source of revenue for banks and payment companies.
The analysis follows the passage of amendments to the Payment and Settlement Systems (PSS) Act, which create a legal framework allowing the government to permit MDR on specified digital payment transactions. Importantly, the legislation does not automatically impose charges. Instead, it gives the Centre the flexibility to introduce MDR through future notifications, with the exact rates, thresholds, and categories yet to be decided. Finance Minister Nirmala Sitharaman has clarified that any future MDR would apply to merchants rather than consumers, meaning ordinary UPI users would continue making payments without direct charges.
Only 4% of Merchant UPI Transactions May Be Charged
Based on FY26 payment patterns, the proposed MDR structure would likely apply only to:
- UPI payments above ₹2,000.
- Transactions made to merchants, not person-to-person transfers.
- Primarily large businesses, while small merchants could remain exempt.
Although these payments represent only about 4% of total merchant UPI transactions, they account for nearly 67% of the value of merchant payments because high-value purchases contribute disproportionately to overall transaction value.
Proposed MDR Coverage
| Category | Expected Treatment |
|---|---|
| Person-to-person (P2P) UPI | No MDR |
| Merchant payments up to ₹2,000 | Expected to remain exempt |
| Merchant payments above ₹2,000 | May attract MDR |
| Small merchants | Likely exempt under proposals |
| Large merchants | Potential MDR applicability |
Why the Government Is Considering MDR
UPI has operated without merchant charges since January 2020, with the government reimbursing banks and payment providers through incentive schemes.
However, rapid growth in digital payments has increased operating costs for:
- Banks.
- Payment service providers.
- Fintech companies.
- Payment infrastructure operators.
Industry participants have argued that a sustainable revenue model is needed to support continued investment in fraud prevention, cybersecurity, and payment infrastructure.
Consumers Will Not Pay the Fee
One of the biggest public concerns has been whether UPI users would be charged for making payments.
The government has clarified that:
- MDR, if introduced, would be paid by merchants.
- Consumers would not be directly charged for using UPI.
- Person-to-person transfers would remain outside the scope of merchant fees.
Finance Minister Nirmala Sitharaman said the proposed framework is intended to affect merchant payment processing rather than individual users.
Who Pays?
| Stakeholder | Direct MDR Impact |
|---|---|
| Consumers | No direct fee |
| Person-to-person UPI users | No fee |
| Large merchants | Potential MDR |
| Banks and payment providers | Receive processing revenue |
Potential Benefits for the Payments Ecosystem
If implemented, MDR could provide a stable revenue stream for digital payment providers.
Potential benefits include:
- Funding payment infrastructure upgrades.
- Supporting fraud detection and cybersecurity.
- Encouraging innovation in digital payments.
- Reducing dependence on government subsidy programs.
- Improving long-term sustainability of the UPI ecosystem.
Analysts estimate that a modest MDR of 0.3%–0.5% on eligible transactions could generate ₹5,000–10,000 crore annually for the ecosystem, depending on the final structure adopted by the government.
Final Structure Yet to Be Announced
While Parliament has created the legal basis for introducing MDR, several key decisions remain pending.
The government is yet to specify:
- Whether MDR will be introduced.
- Applicable transaction thresholds.
- Merchant eligibility criteria.
- MDR rates.
- Effective implementation date.
Until these details are notified, UPI transactions continue under the existing framework without merchant charges.
Looking Ahead
The proposed return of MDR marks a significant evolution in India’s digital payments ecosystem, shifting the focus from rapid adoption to long-term financial sustainability. Although only about 4% of merchant UPI transactions by volume are expected to be affected under current proposals, these high-value payments account for the majority of transaction value, allowing the government to generate meaningful revenue for banks and payment providers while minimizing the impact on most businesses and consumers.
Looking ahead, the government’s final notification will determine how broadly MDR is applied and whether exemptions for smaller merchants are retained. If implemented with targeted thresholds, the policy could provide a sustainable funding model for India’s world-leading UPI ecosystem while preserving the free payment experience that has driven its widespread adoption.
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