The Indian government is exploring the possibility of levying a Merchant Discount Rate (MDR) on Unified Payments Interface (UPI) transactions that surpass ₹2,000. This potential policy shift, outlined in the newly introduced Payment and Settlement Systems (Amendment) Bill, 2027, aims to establish a sustainable revenue mechanism for digital payment infrastructure after years of promoting UPI adoption.
Understanding the Proposed MDR
MDR is a fee paid by businesses to banks and payment service providers for processing digital transactions. Under the current proposal, this charge would primarily apply to merchants, not directly to consumers using UPI. Sources indicate the levy could range from 0.25% to 0.4% (or 25-30 basis points), though no final decision on the rate or implementation timeline has been made.
Officials clarify that the ₹2,000 threshold, while covering only about 5% of all UPI transactions by volume, accounts for approximately 65% of the total transaction value. This suggests the focus is on higher-value commercial transactions, with routine purchases like groceries, milk, and taxi fares likely to remain unaffected.
Exemptions and Impact
- Person-to-Person (P2P) Transfers: These are expected to remain free, ensuring that personal remittances and direct transfers between individuals are not impacted.
- Small Merchant Transactions: The proposed fee structure is likely to target larger merchants, with consultations underway to define what constitutes a 'large threshold' for applicability.
- Majority of Transactions: Even if implemented, an estimated 95% of all UPI transactions by volume would not incur MDR. Furthermore, officials suggest that not all businesses would necessarily pass these small fees on to consumers.
Legislative Context and Background
The Finance Ministry's introduction of the Payment and Settlement Systems (Amendment) Bill, 2027, in Parliament, along with the Taxation and Other Laws (Amendment) Bill, signals a significant policy reconsideration. These bills seek to remove previous legislative bars that prevented banks and payment service providers from imposing MDR on certain digital payment modes, including UPI and RuPay debit cards.
Since January 2020, the government had mandated a zero-MDR policy to accelerate digital payment adoption across India. This strategy has been highly successful, with UPI now dominating the digital payment landscape, accounting for around 88% of all digital transactions. In July alone, UPI processed 23.7 billion transactions valued at nearly ₹29.9 lakh crore.
It is important to note that while the Bill enables the possibility of MDR, it does not set specific rates. Any actual levy would require further legislative approval, a Gazette notification, and detailed guidelines from the Reserve Bank of India (RBI) specifying transaction categories, rates, and implementation procedures.