Digital payments through UPI could become chargeable. Here's what consumers need to know

The Centre has set the ball rolling on levying merchant fees on digital payments such as Unified Payments Interface (UPI) and RuPay debit cards. Finance Minister Nirmala Sitharaman has tabled amendments to the Payment and Settlement Systems Act, 2007 that would permit the government to enable levying of merchant discount rates (MDR) on specified digital payments after being notified in the future.

The proposal has led to divergent reactions from consumers, merchants and industry. While consumers are concerned that UPI, which has been free till now and extremely convenient, will become costlier with the levy of MDR, industry has been seeking the levy for long on digital payments like UPI to make the digital payments infrastructure financially sustainable.

 What does MDR on UPI mean?

 Launched in 2016, UPI has become the dominant mode of payments amongst digital transactions with 23.66 billion transactions worth Rs 29.88 lakh crore in July 2026. Simply put, MDR is a fee that is paid by merchants to banks for processing digital transactions through credit and debit cards. Before 2020, the Reserve Bank of India (RBI) permitted an MDR of 0.40% to 0.90% on the transaction value on debit card payments across all card networks. An MDR of up to 0.30% with a maximum cap of Rs 100 per transaction was applicable on UPI P2M transactions. The zero MDR policy, which was introduced in 2020, was a key driver of the expansion and adoption of UPI as a preferred mode of payment because it enabled merchants and customers to use the payment mode without any additional charges. A survey by the Department of Financial Services highlighted that UPI has emerged as the most preferred mode of transaction, accounting for 57%, surpassing cash transactions at 38%, primarily due to ease of use and instant fund transfer capability.

What does an MDR on UPI mean for consumers?

As of now, consumers need not worry. Government sources indicate that discussions on charging MDR are still underway in terms of the types of transactions and the quantum of charges that would attract the levy. But one thing is clear; they indicate – daily, small value transactions for payments like cab charges, milk and vegetable shopping will not attract MDR. This will ensure that the usage and adoption of MDR continues. Indications are that MDR will be levied on larger ticket size transactions above a threshold of Rs 2,000 or Rs 3,000 at a minimal rate of 0.25% to 0.4%. This would be on payments to businesses through UPI and not on peer-to-peer payments. A recent report by Grant Thornton Bharat noted that only 4% of UPI person-to-merchant transactions currently exceed ₹2,000, indicating that UPI is still in a critical trust-maturity phase.

How will MDR impact businesses?

The GT Bharat report highlighted that over 5 crore merchants in India now accept digital payments, primarily through the 657 million QR codes deployed across tier-1 to tier-6 cities and towns. But the industry has been seeking the reintroduction of MDR on UPI transactions or at least a higher incentive from the government because it makes it unviable for them to invest in digital payments infrastructure. Way back in 2022, the Payments Council of India had sought reintroduction of MDR, noting that the industry expects a loss of Rs 5,500 crore from UPI and RuPay MDR being zero.  To offset the loss from MDR and promote digital transactions, the government has instituted an incentive scheme for promotion of RuPay Debit Cards and low-value BHIM-UPI transactions (P2M). The incentive is paid by the government to the acquiring bank and is then shared in the ecosystem with the Issuer Bank, Payment Service Provider, and Third-Party App Providers. The Government’s budgetary support of ₹8,276 crore for the scheme has been significant, with incentive disbursements of ₹1,389 crore in FY 2021–22, ₹2,210 crore in FY 2022–23, ₹3,631 crore in FY 2023–24, and ₹1,046 crore in FY 2024–25.

What does this mean for now?

The levy will take some time to be notified. Consumers, merchants and industry will have to await the final contours of the scheme. But it is clear that the MDR will not have to be borne by consumers and will have to be divided between the merchants and the acquiring bank. The Centre is clear that it is keen on further boosting the usage and adoption of UPI and UPI Lite in rural and semi-urban areas.