With legislative changes introduced in Parliament, the Centre may reintroduce a merchant discount rate (MDR) of 0.25-0.35% on UPI transactions over Rs 2,000 for large merchants to compensate banks and payment service providers for rising operational costs and technology investments, sources said, citing ongoing deliberations.

However, merchants and businesses with an annual turnover up to Rs 1.5 crore are likely to be exempt from the levy, irrespective of the transaction amount.

MDR is a fee paid by businesses to payment processors for accepting digital payments.

The Centre on Tuesday introduced a Bill in Parliament to amend the Payment and Settlement Systems Act, 2007, paving the way for levying a merchant discount rate (MDR) on UPI and RuPay debit card transactions. The government had scrapped MDR on UPI and RuPay debit card transactions starting January 2020 to encourage digital payments and expand merchant acceptance.

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To offset the loss of MDR revenue, the government has been providing an incentive of 0.15% on UPI transactions below Rs 2,000. However, the Payments Council of India (PCI) argued that the subsidy is inadequate given the growing costs of maintaining and expanding the digital payments infrastructure.

For context, other digital payment instruments continue to attract MDR. Credit card transactions typically carry an MDR of around 2%, while non-RuPay debit card transactions attract an MDR of about 0.9%.

Transactions of Rs 2,000 and above account for just 4% of person-to-merchant (P2M) UPI transactions. In comparison, 86% of P2M transactions are below Rs 500, while 10% fall in the Rs 501-2,000 range, according to FY26 data.

Industry body Payments Council of India (PCI) said last year that around 60 million merchants in India accept digital payments. Of these, about 90% are small merchants with an annual turnover up to Rs 20 lakh.

Earlier this year, the Department of Financial Services (DFS) informed a Parliamentary panel that the government incentive covers only around 11% of the industry’s costs and roughly 14% of the potential MDR revenue that could have been earned if merchant charges had been allowed.

The government’s approach appears designed to strike a balance, keeping digital payments free for consumers and small businesses, while creating a sustainable revenue model for the banks, PSPs, and payment infrastructure providers that power this ecosystem, said Mehul Mistry, Senior Vice President – Customer Success, Strategy & Growth Zeta, a fintech.

“Based on current discussions, we expect UPI MDR to be in the range of 5–7 basis points (0.05–0.07%), and RuPay debit card MDR at around 15–20 basis points (0.15-0.20%), applicable only to large merchants above an annual turnover of roughly ₹1–1.5 crore,” Mistry said.

This threshold-based structure protects the smallest players while ensuring continued investment in the security, reliability, and scale that digital payments infrastructure demands, he added.

After a decade of operations, UPI has emerged as the country’s dominant retail payments platform, recording 23.66 billion transactions in July 2026.

Annual transaction volume has surged from just 20 million transactions in FY17 to more than 241.62 billion in FY26—an almost 12,000-fold increase. During the same period, transaction value rose from Rs 7,000 crore to around Rs 314 lakh crore, marking a more than 4,000-fold increase.