The Centre may reintroduce a merchant discount rate (MDR) on UPI transactions of Rs 2,000 and above for large merchants to compensate banks and payment service providers for rising operational costs and technology investments, sources said.
The proposed MDR on UPI payments accepted by large merchants won’t exceed 0.5% of the monetary value, a source said.
MDR is a fee paid by businesses to payment processors for accepting digital payments.
However, merchants and businesses with an annual turnover of up to Rs 1.5 crore are likely to be exempt from the levy, irrespective of the transaction amount. A decision on the proposal is expected within a month, the sources added.
Larger merchants are better placed to absorb the MDR or pass on the cost to customers, whereas small businesses have limited ability to do so, the government reckons.
Protecting Small Vendors
Imposing MDR only on higher-value transactions by larger merchants would not hurt, as 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) had said last year that around 60 million merchants in India accept digital payments. Of these, about 90% are small merchants with annual turnover of up to Rs 20 lakh.
The government scrapped MDR on UPI and RuPay debit card transactions from January 2020 to encourage digital payments and expand merchant acceptance. Before that, merchants paid an MDR of less than 1% on UPI and RuPay debit card transactions.
Other digital payment instruments continue to attract MDR, with credit card transactions typically carrying an MDR of around 2%, while non-RuPay debit card transactions attract about 0.9%.
Infrastructure Cost Deficit
To offset the loss of MDR revenue, the government has been providing an incentive of 0.15% on UPI transactions below ₹2,000. However, PCI has argued that the subsidy is inadequate given the growing costs of maintaining and expanding the digital payments infrastructure.
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.
Last year, PCI also urged the government to urgently reconsider the zero-MDR policy for UPI and RuPay debit card transactions.
After a decade of operations, UPI has emerged as the country’s dominant retail payments platform. 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 jump.
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