India's free UPI payment ecosystem could see a major policy shift as the central government has proposed amendments that may allow merchant discount rates (MDR) on select UPI transactions in the future.
However, no charges have been introduced yet, and UPI payments for consumers will continue to remain free under the current system.
Proposed Amendments to Payment Laws
The proposed changes to the Payment and Settlement Systems Act were introduced in Parliament by Finance Minister Nirmala Sitharaman. The amendment does not directly impose any fees but creates a legal framework that would allow the government to introduce MDR if required.
According to reports, discussions are still underway regarding the possible implementation model, including the transaction categories that could attract charges and the applicable rates.
What MDR Model Is Being Considered
One proposal under consideration is to introduce an MDR of 0.3% to 0.5% on UPI transactions above Rs 2,000 made to large businesses. The fee may apply to merchants with annual turnover exceeding Rs 1.5 crore, ensuring that small retailers and neighbourhood shops remain unaffected.
Another option being evaluated is linking MDR charges to a merchant's annual turnover rather than the value of individual transactions. The government is exploring ways to ensure that any potential fee primarily impacts larger businesses while protecting smaller merchants.
What Is MDR and Why Does It Matter
MDR is a processing fee paid by merchants to banks and payment service providers for handling digital transactions. While credit card payments usually involve processing charges, UPI transactions have remained free for merchants since their introduction.
Industry stakeholders have argued that the zero-fee model makes it difficult for payment companies to generate revenue from UPI services.
They believe a limited MDR on high-value transactions could help companies invest in payment infrastructure, technology, and future innovations.
UPI's Growing Scale
The discussion comes as UPI continues to expand rapidly across India. The platform processed 23.6 billion transactions worth Rs 29.9 trillion in July, strengthening its position as one of the world's largest real-time payment networks.
While transactions above Rs 2,000 represent only a small portion of total merchant UPI transactions by volume, they contribute a significant share of the overall transaction value.
Industry estimates suggest that applying MDR to this segment could potentially generate Rs 5,000 crore to Rs 10,000 crore annually for digital payment companies.
Current Status
At present, the proposal remains only a legal provision, and the government has not announced any final decision on MDR rates, affected transactions, or implementation timelines. Until further announcements, UPI payments will continue to remain free for users and merchants.
