The Centre is mulling over levying a Merchant Discount Rate (MDR) on UPI transactions through a proposed amendment to the Payment and Settlement Systems Act, 2007.
The MDR is a fee that a business pays to a bank for processing digital and card payments. Merchants are prohibited from passing this fee on to customers. In practice, when a customer makes a payment using a credit card, around 1.5 per cent of the transaction amount is deducted as MDR and shared between the issuing and acquiring banks.
Since 2020, there has been a ‘zero-MDR’ provision for payment modes such as UPI and RuPay debit cards, whether the transactions are processed directly or indirectly.
Section 10A of the Payment and Settlement Systems Act, 2007 says “no bank or system provider shall impose, whether directly or indirectly, any charge upon a person making or receiving a payment by using one or more electronic modes of payment as may be notified by the Central Government.”
Payment types like Visa or Mastercard debit cards, credit cards, and corporate wallets are not included under this section, allowing banks to impose an MDR on such transactions.
If the provision is removed, the government will have the power to impose charges on these methods.
According to the National Payments Corporation of India (NPCI), a 0.3 per cent MDR can be levied for Person-to-Merchant UPI transactions. However, this has so far been operated under the zero-MDR policy.
The proposed amendment will only include payments from businesses. It will not apply to transactions made from one person to another.
The move comes after the Payments Council of India (PCI) in March, 2025 submitted a letter to the Centre, requesting an urgent reconsideration of the zero-MDR policy.
The PCI mentioned that it faced financial pressure due to the innumerable payments made through UPI and RuPay transactions. It highlighted that the annual costs for maintaining UPI services were around ₹10,000 crore. While the government provides an incentive of ₹1,500 crore to offset this, it covers only a fraction of the cost.
Reports indicate that if MDR is introduced in the future, it will be for transactions above the price of ₹2000, excluding low-value transactions.
