The Indian government has initiated a significant policy shift within the digital payments landscape by introducing amendments to the Payment and Settlement Systems (PSS) Act. These changes, part of the Taxation and Other Laws (Amendment) Bill, 2026, open the door for the reintroduction of Merchant Discount Rate (MDR) on UPI and RuPay debit card transactions, specifically targeting large merchants.
Understanding the Policy Shift
Since January 2020, India has maintained a zero-MDR regime for UPI and RuPay debit card transactions. This policy was implemented to boost digital payment adoption across the country. The proposed amendment removes the statutory provision enforcing this zero-MDR policy, granting the Centre the authority to decide, via notifications, where such charges may apply.
Who Will Be Affected?
Industry experts anticipate that the reintroduction of MDR will primarily impact large merchants with an annual turnover exceeding ₹50 crore. Crucially, the proposal clarifies that consumers will not bear these charges directly. The Merchant Discount Rate is a fee paid by businesses to banks and payment service providers for processing digital transactions, meaning any new fees would be absorbed by the merchants accepting payments, not the individuals making them.
Small businesses are expected to continue receiving government support. Existing incentive schemes, such as the Incentive Scheme for Promotion of RuPay Debit Cards and Low-Value BHIM-UPI (P2M) Transactions, which support eligible transactions up to ₹2,000 for small merchants, are projected to remain in place, with budget allocations continuing for FY27.
Why the Change Now?
The move comes after persistent arguments from banks and fintech companies that the zero-MDR policy made the digital payments ecosystem financially unsustainable. These providers invest heavily in infrastructure, cybersecurity, and fraud prevention but have limited avenues to recover operational costs. A Parliamentary Standing Committee on Finance echoed these concerns in its March 2026 report, stating that the "absence of MDR makes the UPI ecosystem financially unsustainable" and recommending a sustainable revenue model.
The Future of Digital Payments
UPI continues its rapid growth, processing a record 23.66 billion transactions worth nearly ₹29.9 lakh crore in July 2026. This underscores its critical role in India's digital economy. The proposed policy aims to strike a delicate balance: ensuring the financial viability and continued investment in the digital payments ecosystem while maintaining the convenience and accessibility that have made UPI one of the world's largest real-time payment platforms.