BT Exclusive: Large merchants may bear UPI MDR under proposed framework, say sources

Large merchants and e-commerce platforms could soon bear a nominal Merchant Discount Rate (MDR) on Unified Payments Interface (UPI) transactions as the government explores a framework aimed at ensuring the long-term sustainability of India's digital payments ecosystem, according to sources familiar with the discussions.

Sources told Business Today TV that the proposal under consideration is driven primarily by cost recovery rather than revenue generation. Banks and payment ecosystem participants are estimated to be incurring annual losses of nearly ₹5,000-6,000 crore due to the absence of MDR on UPI transactions.

While the Centre currently provides incentives to support the UPI ecosystem, industry estimates suggest that these subsidies cover only about half of the actual cost incurred by banks and payment service providers.

Under the proposed framework, an MDR of around 0.04% is being discussed for select merchants, sources said. The charge is likely to apply only to large businesses with annual turnover exceeding ₹4 crore. Consumers are unlikely to be directly affected, as the MDR would be payable by merchants.

The development comes after the Lok Sabha passed the Taxation and Other Laws (Amendment) Bill, 2026, which amends the Payment and Settlement Systems Act, 2007, empowering the government to determine which digital payment modes may attract charges.

The amendment removes the existing legal provision that prevented banks and payment service providers from levying MDR on notified electronic payment modes such as UPI.

However, the government has clarified that no final decision has yet been taken on imposing MDR.

On August 6, Union Finance Minister Nirmala Sitharaman, in a post on X, said that MDR applies only to merchants and not end users or customers. She added that the proposed framework is intended to support banks and fintech companies in investing more in payment infrastructure, innovation and security, ultimately benefiting all UPI users.

The Finance Minister also said that the UPI and Services Steering Committee, headed by the National Payments Corporation of India (NPCI), will take a call on the MDR framework after Parliament completes the legislative process.

The move comes amid growing concerns within the banking and fintech industry over the financial sustainability of India's rapidly expanding UPI ecosystem. With UPI accounting for the overwhelming majority of digital payment volumes in the country, industry stakeholders have argued that a limited MDR on large merchants would help recover infrastructure costs while preserving free digital payments for millions of consumers.