India's Finance Ministry has presented the Payment and Settlement Systems (Amendment) Bill, 2027, in Parliament, signaling a potential shift in the nation's digital payment landscape. This legislative move could enable the reintroduction of a Merchant Discount Rate (MDR) on various digital payment methods, including the widely used Unified Payments Interface (UPI).
What is Merchant Discount Rate (MDR)?
MDR is a fee paid by businesses to banks and payment service providers for processing digital transactions. Crucially, any reintroduction of MDR would apply to merchants, not directly to consumers using UPI for payments.
A Policy Reversal from 2020
This development marks the first major policy adjustment since January 2020, when the government abolished MDR on UPI and RuPay debit card transactions. The initial decision was aimed at accelerating the adoption of digital payments across the country, a goal largely achieved with UPI's explosive growth.
However, the zero-MDR regime has faced criticism for making the UPI ecosystem financially unsustainable for payment service providers. A Parliamentary Standing Committee previously highlighted these concerns, even as UPI continued its rapid expansion.
Government to Decide Future Levy
The new Bill does not immediately impose any charges. Instead, it grants the government the authority to determine, through future notifications and rules, which digital payment instruments will remain exempt from MDR and which may incur the fee. This amendment replaces a previous provision in the Payment and Settlement Systems Act, 2007, which mandated zero MDR for specified digital payment methods.
Officials have clarified that the Bill itself does not prescribe specific MDR rates. Any future levy would require legislative approval, a Gazette notification, and subsequent guidelines from the Reserve Bank of India (RBI) detailing applicable transaction categories, rates, and implementation frameworks.
Proposed MDR and Transaction Categories
Sources familiar with ongoing discussions suggest a proposed MDR on UPI transactions could range from 25 to 30 basis points (bps). This translates to approximately 25 to 30 paise for every Rs 100 transaction, or Rs 2.50 to Rs 3 per Rs 1,000 transaction.
It is anticipated that these charges would primarily apply to merchant transactions exceeding Rs 2,000. Person-to-person (P2P) UPI transfers are expected to remain free, ensuring that everyday small transactions continue to be cost-free for individuals.
Why the Reconsideration?
The primary driver behind this reconsideration is the long-standing argument from the digital payments industry that the zero-MDR regime is financially unsustainable. Despite India's digital payments market witnessing exponential growth—with UPI accounting for around 88% of all digital transactions and processing over 23 billion transactions monthly—payment companies have struggled to invest in infrastructure without a stable revenue stream from transaction fees.
A government-appointed committee on digital payments had also previously recommended implementing market-based pricing to ensure the long-term viability of the UPI ecosystem amidst surging transaction volumes. The Finance Ministry emphasizes that the amendment provides policy flexibility, and any final decision regarding MDR rates, exemptions, and merchant categories will involve due consultation.