UPI May See Return Of MDR As Govt Moves To Amend Payments Law

New Delhi, Aug 5 (KNN) The Union Finance Ministry has proposed amendments to the Payment and Settlement Systems Act, 2007, which could allow the reintroduction of Merchant Discount Rate (MDR) on Unified Payments Interface (UPI) transactions for select categories, particularly large merchants. 

The move is seen as an initial step towards creating a sustainable revenue model for India’s rapidly expanding digital payments ecosystem.

The proposal includes removing provisions under Section 10A that currently bar banks and payment service providers from levying charges on notified electronic payment modes. Once approved by Parliament, the government would be authorised to notify the transactions and categories where MDR may apply.

No Charges for Consumers

The proposal does not envisage any fees for UPI users. Instead, the MDR, if introduced, is expected to be borne by merchants. At present, merchants receive the full transaction value on UPI payments, unlike card transactions where a small fee is deducted and shared among stakeholders.

Background: Zero-MDR Policy

The government had abolished MDR on UPI and RuPay debit card transactions from January 2020 to promote digital payments adoption. This policy significantly accelerated usage, with UPI now accounting for nearly 88 per cent of all digital transactions in India. 

The platform currently processes over 23 billion transactions worth around Rs 30 lakh crore each month.

Sustainability Concerns

The proposed change follows concerns raised by the Parliamentary Standing Committee on Finance in its March 2026 report, which described the zero-MDR framework as financially unsustainable over the long term. 

While acknowledging its role in improving affordability and financial inclusion, the committee noted that the absence of a revenue stream has limited the ability of banks and payment firms to invest in infrastructure, innovation, and cybersecurity.

The committee highlighted that UPI could expand significantly, potentially adding 600 million users and handling 100–150 billion transactions monthly. However, such growth would require sustained investment, which may not be viable through government incentives alone.

Next Steps

If the amendment is passed, the government is expected to notify specific MDR rates and define the scope of transactions where such charges would apply. The proposal aims to balance continued user adoption with the financial viability of ecosystem participants as UPI enters its next phase of growth.

(KNN Bureau)