The Centre has opened the door to introducing a nominal Merchant Discount Rate (MDR) on a limited set of UPI merchant transactions above a specified threshold, potentially marking a shift in how India’s rapidly expanding digital payments ecosystem is funded.

The proposed framework, however, does not mean that UPI payments will become chargeable for everyone. On Saturday, the Ministry of Finance clarified that consumers and person-to-person (P2P) transactions will continue to remain free, while any future MDR would be restricted to a limited category of merchant payments.

The government also said any such charge would be substantially lower than MDRs applicable to debit and credit card transactions.

Who could have to pay UPI MDR?

Under the proposed framework, merchants could be charged MDR on selected UPI transactions above a certain threshold.

The Finance Ministry said any MDR, if introduced, would be imposed only on a “limited set of merchant transactions” and at a nominal rate.

This means the government is not proposing a blanket charge on every UPI payment made at a shop, restaurant or online platform.

The exact transaction threshold and the categories of merchants or payments that could attract MDR have not yet been specified.

Once the proposed Bill is passed, these details would be decided by the UPI and Services Steering Committee, headed by the National Payments Corporation of India (NPCI).

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What will remain free?

For ordinary users, the government has reiterated that UPI will remain free. Person-to-person transactions, such as transferring money to family members or friends, will continue to remain free.

The government has also stressed that the “vast majority” of UPI transactions will continue to carry no charge for merchants.

Therefore, the proposed change should not be interpreted as a move to introduce a fee every time a consumer scans a QR code or sends money through a UPI app.

Why is the government considering MDR now?

The proposed change comes against the backdrop of explosive growth in UPI transactions. As transaction volumes have increased, the digital payments infrastructure supporting UPI has also required continuous investment in cybersecurity, fraud prevention, payment infrastructure and system capacity.

The government said relying entirely on subsidies to support the ecosystem may not be sustainable as UPI enters its next phase of growth.

“Reliance on subsidies alone is not viable for the next wave of growth,” the Finance Ministry said, arguing that a balanced revenue framework is needed to keep the payments system robust and future-ready.

The proposed MDR could therefore provide an additional revenue mechanism for the wider digital payments ecosystem while keeping the basic UPI experience free for consumers.

How is this different from card payments?

In India’s debit and credit card ecosystem, MDR already exists. It is generally paid by merchants to payment service providers and other participants involved in processing a transaction.

The government’s proposed UPI framework would be different in scale and scope.

According to the Finance Ministry, any UPI MDR would be far lower than the rates applicable to debit and credit cards and would only apply to transactions meeting specified conditions.

The government is therefore attempting to preserve UPI’s cost advantage while creating a mechanism through which at least some high-value or selected merchant transactions could contribute towards the cost of maintaining the payments infrastructure.

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What does the proposed law actually do?

The issue is linked to the Taxation and Other Laws (Amendment) Bill, 2026, which proposes an amendment to Section 10A of the Payment and Settlement Systems Act, 2007. The proposed amendment is an enabling provision. It does not itself impose an MDR on UPI transactions.

If Parliament passes the Bill, the UPI and Services Steering Committee headed by NPCI would determine whether MDR should be introduced and, if so, the applicable framework.

This means the actual rate, threshold and categories of transactions that could attract a charge would be decided separately.

Could consumers eventually pay?

For now, the government’s position is clear: consumers will not be charged for ordinary UPI payments, and P2P transactions will remain free. The potential change is focused on the merchant side of the ecosystem.

However, the MDR’s introduction could indirectly become relevant to consumers if merchants decide to factor payment-processing costs into their pricing. Whether that happens would depend on the eventual MDR structure, its size and how businesses respond.

Why this matters for India’s digital economy

UPI has become a critical part of India’s payments infrastructure, handling billions of transactions and serving as the backbone of the country’s shift towards digital payments.

The government’s latest move highlights a larger challenge: how to finance the next stage of UPI’s growth without undermining the low-cost model that helped drive its mass adoption.

The Finance Ministry said the proposed amendment is intended to create a sustainable framework that can encourage more companies to invest and expand within the digital payments ecosystem.

The government also rejected reports that external influences were driving the proposed changes, describing such claims as “unfounded, completely false and misleading.”