Government weighs MDR on select UPI payments to support ecosystem

The government is considering reintroducing the merchant discount rate (MDR) on certain high-value UPI transactions or adopting a tiered incentive system to reduce its financial support for the digital payments ecosystem gradually.

In its response to the Parliamentary Standing Committee on Finance, the Department of Financial Services said it was assessing both options to ensure the long-term sustainability of the Unified Payments Interface while limiting the burden on the public exchequer.

One proposal involves restoring MDR for transactions or merchants above a specified threshold. The other would introduce incentives at different levels and phase out government support over the next few years.

In a report tabled on Wednesday, the parliamentary panel noted that the government had allocated Rs 2,000 crore to promote UPI payments and compensate the industry for revenue lost under the zero-MDR framework.

However, the committee said the allocation was far below the digital payments industry’s estimated annual operating cost of Rs 20,700 crore. It warned that insufficient compensation could constrain investment in cybersecurity, fraud prevention and payment network infrastructure.

The panel estimated that the present incentive covers about 11 per cent of the industry’s actual costs and approximately 14 per cent of the MDR revenue that payment providers could otherwise have collected.

UPI merchant payments have attracted no MDR since January 2020, when the government abolished the charge to accelerate digital transactions and encourage consumers and businesses to move away from cash. Before the change, an MDR of up to 0.30 per cent applied to merchant transactions conducted through UPI.

The committee said UPI could eventually process as many as 150 billion transactions a month and attract another 600 million users, increasing the need for sustainable funding of the underlying infrastructure.

Parliament recently passed the Taxation and Other Laws (Amendment) Bill, 2026, which amended the Payment and Settlement Systems Act, 2007. The changes allow the government to designate electronic payment methods that will continue to receive statutory protection from transaction charges.

However, the government has not yet authorised the imposition of MDR on UPI payments.

With IANS inputs