Government Proposes MDR on Select UPI Payments: Key Details

The Ministry of Finance is proposed changes in the Payment and Settlement Systems Act of 2007 which would provide the Merchant Discount Rate (MDR) back on some digital transactions including UPI transfers. The announcement made on August 3, 2026 is meant to eliminate the clause on current no-MDR application under Section 10A which prohibits banks and providers of payment systems to charge customers for some digital transactions. The goal of these changes is to ensure long-term sustainability of rapidly growing digital payments market.

What Does the Government Propose?

The amendment suggested will take away the provisions that mandate zero merchant discount rates on the mentioned digital payment processes.

Once the Parliament approves the proposal, lenders and companies involved with the digital payment platforms would be able to charge MDR on specific UPI payment transactions like transactions that involve big merchants.

The proposal for this would be through the Taxation and Other Laws (Amendment) Act, 2026, which will probably be introduced into Parliament in the first week of August 2026.

What Is Merchant Discount Rate (MDR)?

Merchant Discount Rate (MDR) refers to the fees that merchants must pay banks or payment service providers to process transactions carried out electronically. The rate is computed as a percentage of the total transaction amount.

MDR was applicable to all types of payments, including debit cards and other electronic modes of payment before January 2020.

In order to increase the adoption of digital payments, the government removed MDR on UPI and RuPay debit card payments after January 2020.

Who Will Likely Be Affected?

As stated in the proposal, it appears that the MDR will apply largely to large merchants.

To summarize the proposed framework,

• Large merchants with an annual turnover greater than ₹50 crore may come under the ambit.
• Small merchants with annual turnover less than ₹1.5 crore may be exempt.
• Consumers would not need to pay any MDR.
• The MDR on qualifying UPI transactions is suggested to be fixed at 0.5% of the transaction amount.
• There is also speculation that payments over ₹2,000 may be subjected to the MDR, but the final outcome will depend on Parliament’s passing of the legislation.

Why Is the Government Considering MDR Again?

In recent years, India’s digital payments system has seen phenomenal growth. Nevertheless, banks and payment service providers have repeatedly pointed out that it is difficult to find the funds necessary to sustain and develop the technological infrastructure without specific revenues.

The Parliamentary Standing Committee on Finance issued a report in March 2026 indicating that the absence of the MDR made the UPI system financially unviable in the future.

The main goal of re-introducing the MDR for designated transactions is to establish a solid collection mechanism while safeguarding the interests of micro businesses and consumers.

UPI’s Huge Growth

These figures are coming in the middle of the explosion of use of UPI across the country.

Some noteworthy figures are,

• In July 2026 alone, over 23 billion transactions were made through UPI.
• Total transaction value was around ₹29.9 lakh crore during the month.
• UPI is now India’s largest real-time digital payment system allowing for direct transfers between banks.

The growth of UPI over recent years has given rise to the idea of the need to develop the infrastructure for payment, security, and innovation.