Potential Reintroduction of Merchant Discount Rate (MDR) on UPI: Government Proposal Aimed at the Sustainability of the Digital Payment System
The Ministry of Finance has proposed amending the Payment and Settlement Systems Act, 2007, to reintroduce the Merchant Discount Rate (MDR) on certain digital transactions involving UPI and RuPay. Under the proposal, MDR would primarily apply to large merchants, while small merchants and consumers are likely to be exempted. The government aims to establish a sustainable revenue model for banks and payment service providers to support digital payment infrastructure, cybersecurity, and innovation. Currently, UPI stands as one of the world's largest real-time digital payment systems, having significantly boosted financial inclusion and the cashless economy in India.
The Ministry of Finance has proposed an amendment to the Payment and Settlement Systems Act, 2007. The proposal seeks to remove the provision in Section 10A that had exempted UPI and RuPay debit card transactions from the Merchant Discount Rate (MDR) since January 2020. The government's objective is to ensure the long-term financial sustainability of the digital payment system.
What is the Merchant Discount Rate (MDR)?
The Merchant Discount Rate (MDR) is a service fee paid by a merchant to a bank or payment service provider for accepting digital payments. This fee is typically a fixed percentage of the total transaction amount. It is important to note that the MDR is paid by the merchant, not the consumer.
Key Features of the Proposed Amendment
According to the proposal, once parliamentary approval is obtained, MDR could be levied on specific categories of UPI transactions—particularly those involving large merchants. Preliminary suggestions indicate that merchants with an annual turnover exceeding ₹50 crore could be brought under this ambit, whereas small merchants with an annual turnover of less than ₹1.5 crore are likely to be exempted. There is no proposal to levy additional charges on consumers, and a maximum MDR of 0.5% has been suggested for UPI transactions.
Why is the government reconsidering the MDR?
The rapid expansion of UPI has increased the pressure on banks and payment service providers to continuously invest in technical infrastructure, cybersecurity, server capacity, and innovation. In its report, the Parliamentary Standing Committee on Finance (March 2026) stated that without a revenue source like MDR, operating the UPI system could become economically challenging in the future. Therefore, the government aims to develop a sustainable revenue model for the digital payment ecosystem.
Significance of India's digital payment system
India's Unified Payments Interface (UPI) has emerged as one of the world's largest real-time digital payment systems. In July 2026, over 23 billion transactions were conducted via UPI, with a total value of approximately ₹29.9 lakh crore. UPI has imparted fresh momentum to financial inclusion, the cashless economy, e-governance, and the Digital India campaign.
Significance for the UPSC Examination
This topic is crucial for GS Paper-III (Indian Economy, Banking, Financial Inclusion, Digital Economy) and GS Paper-II (Governance, Government Policies, and Interventions). Aspirants should comprehensively study the Payment and Settlement Systems Act, 2007, MDR, UPI, RuPay, NPCI, digital payment infrastructure, financial inclusion, and contemporary reforms related to the digital economy. This topic is equally important for the Preliminary Examination, the Main Examination, and the Interview.
