Govt Mulls MDR On High-Value UPI Transactions, Tiered Incentives For UPI Self-Sustainability: FinMin tells Panel

New Delhi, Aug 13 (KNN) The current financial model for the Unified Payments Interface (UPI) is unsustainable and could undermine investments in cybersecurity, fraud prevention and network infrastructure, the Parliamentary Standing Committee on Finance has said.

The government is exploring two options to make the UPI ecosystem financially sustainable: restoring the Merchant Discount Rate (MDR) on certain high-value transactions or high-turnover merchants, and introducing a tiered incentive structure to gradually phase out government support, the Ministry of Finance told the committee.

Government Weighs Two Options

The Department of Financial Services (DFS) said it was examining the feasibility of restoring MDR for transactions or merchants above a specified threshold. It is also considering a tiered incentive structure that would allow government support to be reduced over the next few years.

MDR is a fee paid by merchants to payment ecosystem participants, including banks and payment processors, for processing digital transactions. UPI transactions have been exempt from MDR since January 2020 as part of efforts to accelerate digital payments.

The government has not yet operationalised any MDR on UPI. The proposed framework is expected to cover only a limited category of high-value merchant transactions, with the fee likely to remain below charges applicable to card transactions.

Subsidy Falls Short of Industry Costs

The committee highlighted a significant gap between government support and the estimated cost of operating the UPI ecosystem. The current allocation of Rs 2,000 crore to incentivise UPI transactions and offset zero-MDR costs compares with an estimated industry operational cost of Rs 20,700 crore.

According to the committee, the existing incentive covers only around 11 per cent of the industry's actual costs and 14 per cent of potential MDR collections.

The panel warned that continued dependence on inadequate government support could constrain payment service providers' ability to invest in cybersecurity, fraud prevention and network infrastructure as UPI transaction volumes increase.

UPI is expected to process up to 150 billion transactions a month and add around 600 million users, further increasing the financial pressure on the ecosystem.

Legal Framework Now Allows MDR

The committee also noted that recent legislative changes have created the statutory framework to allow calibrated MDR on selected UPI transactions.

The Taxation and Other Laws (Amendment) Bill, 2026, passed by the Lok Sabha on August 6, amended the Payment and Settlement Systems Act, 2007, enabling the government to notify electronic payment modes and transactions that may be subject to charges. However, the government has yet to notify any MDR for UPI.

The UPI and Services Steering Committee, headed by the National Payments Corporation of India (NPCI), is expected to determine the structure and threshold for any such charge.

Consumers Unlikely To Face Direct Charges

The government has indicated that any future MDR would be limited to selected merchant transactions above a high threshold. Finance Minister Nirmala Sitharaman has said consumers would continue to use UPI for instant digital payments without a transaction fee.

The finance committee said establishing a viable revenue mechanism would be critical to ensuring the long-term financial sustainability of UPI without placing a continuing burden on the government exchequer.

(KNN Bureau)