The Unified Payments Interface (UPI) has become an indispensable pillar of India’s digital payments ecosystem. With staggering transaction volumes reaching several lakh crore monthly, UPI serves as a crucial enabler for individuals and businesses alike. However, this widely adopted, free-to-use service may soon see the introduction of a Merchant Discount Rate (MDR).

Crucially, the government has clarified that UPI will continue to remain free for consumers, with no transaction charges applicable to person-to-person (P2P) payments. Any future MDR implementation will be confined to a specific category of merchant transactions, with a nominal rate significantly lower than that currently applied to credit or debit card transactions.

Recent reports suggest a threshold of Rs 2,000 is being considered, with a potential MDR ranging from 0.25% to 0.4%. This implies that daily essential transactions for items like milk, vegetables, and groceries would remain exempt from these charges.

What exactly is a Merchant Discount Rate? How does it currently function for credit/debit cards, and why is its introduction being considered for UPI? Ultimately, who will bear the final cost of UPI MDR?

What is MDR and how the system currently works for credit cards

Let’s first understand what is Merchant Discount Rate:

Merchant Discount Rate (MDR) is a fee merchants pay to accept payments made via credit or debit cards. This fee, typically a percentage of the transaction value, is deducted by the bank before the merchant receives their payment.

Vivek Iyer, Partner and Financial Services Risk Advisory Leader at Grant Thornton Bharat, explains that credit card MDR comprises three components: an interchange fee (paid to the card issuer bank), a network/switching fee (paid to card settlement providers like Visa/Master/Amex), and a fee for the acquirer bank (which onboards the merchant).

What is MDR & how it works

Consider an example: You purchase an item for Rs 10,000 using your credit card, with a 2% MDR applicable. While you pay Rs 10,000, the merchant only receives Rs 9,800, with Rs 200 deducted as MDR. This Rs 200 is then distributed among the three components mentioned, with the largest portion going to the interchange fee and the smallest to the card settlement provider, according to Iyer.

Also Read | No charges for UPI users: Government clarifies person-to-person transactions to remain free; top points

Why MDR is being proposed for UPI

The government states that the proposed amendment to the Payment and Settlement Systems Act aims to enhance the financial sustainability of the UPI ecosystem. With soaring transaction volumes, continuous investment in infrastructure, cybersecurity, and fraud prevention is critical. A self-sustaining revenue model would foster competition and facilitate future expansion.

RBI Governor Sanjay Malhotra highlighted that the costs are already being indirectly borne by the economy. “Now, costs have to be paid by someone — it’s a public [good]; we all want this particular infrastructure to continue to strengthen, become more efficient. That’s our focus as of now — let’s watch how developments proceed,” Malhotra stated. He added, “…Please keep in mind that ultimately it is the consumer, in some way or the other, who is already paying it – it may not be the same consumer, it may be the general economy, and you don’t get to see it directly, but it’s already happening in some form.”

Ranadurjay Talukdar, Partner and Payments Sector Leader at EY India, notes the significant cost structure differences between credit/debit cards and UPI. “On credit cards, MDR is unregulated and can run up to about 3% of the transaction value, largely because banks and payment networks carry fraud, rewards and chargeback costs,” he explained to TOI.

What RBI governor said on UPI

For non-RuPay debit cards, MDR is capped at 0.40% (max Rs 200) for small merchants with less than Rs 20 lakh annual turnover and 0.90% (max Rs 1000) for larger merchants. RuPay debit cards, much like UPI, currently have zero MDR.

UPI has been mandated to have zero MDR since January 2020, a move aimed at accelerating adoption, which removed a small MDR (up to 0.30% on person-to-merchant transactions) that existed pre-2020.

“That’s the structural gap the current amendment is trying to address: UPI has scaled to 2,366 crore transactions worth Rs 29.9 lakh crore in July 2026 alone without a revenue stream funding the banks and fintechs that play a critical role to run the rails,” Talukdar added.

Also Read | Will you have to pay to use UPI? 7 FAQs on possible MDR and what it means for consumers answered

Who pays the final cost?

Experts concur that merchants typically bear the cost, even for credit and debit cards, though some may pass it on as a convenience charge.

“RBI rules bar merchants from passing it (MDR) directly onto customers. In practice, though, the fee is usually absorbed by the merchant, though some pass it through as a convenience charge, and where it isn’t itemised, it tends to get folded into pricing,” Ranadurjay Talukdar of EY India told TOI.

He further elaborated, “The government has said that consumers won’t face any transaction charges on UPI, and all P2P and P2PM transfers stay free. And the government has said it would be threshold-based, apply to a limited set of merchant transactions, and sit below card MDRs. So direct pass-through to consumers is meant to be structurally blocked, the same way it’s technically restricted on cards today.”

UPI Charges: What Changes & What Doesn’t

The final decision on the applicability and structure of MDR rests with the NPCI-led UPI and Services Steering Committee. Talukdar notes that implementation challenges could arise from incorrect merchant turnover reporting and MCC misclassification, which need to be addressed.

Mihir Gandhi, Partner and Leader – Fintech and Payments Transformation, PwC India, suggests that if MDR is introduced for large-value merchants and higher-value UPI transactions, merchants are likely to absorb the cost, given they already factor in credit/debit card MDRs. He anticipates this cost to be lower than card MDRs.

However, Vivek Iyer of Grant Thornton Bharat believes that due to competitive market pressures, merchants’ ability to increase prices is limited. “Hence we don’t believe that costs are indirectly included by merchants in the product costs,” he states. He expects merchants to adopt practices similar to those for debit cards when UPI MDR is introduced, as it offers a closer parallel.

What FM Sitharaman has said:

Finance Minister Nirmala Sitharaman has reassured consumers that UPI transactions will remain free for them. She clarified that the Taxation and Other Laws (Amendment) Bill does not impose any tax or transaction fee on UPI payments.

What FM Sitharaman has clarified

Sitharaman stated that if MDR is introduced in the future, it would only apply to transactions exceeding a predefined threshold. The UPI Services Steering Committee, chaired by the National Payments Corporation of India (NPCI), will determine if and how MDR should be introduced, including its scope and structure.

“Will consumers pay any UPI charge? No,” Sitharaman affirmed in the Rajya Sabha. “UPI has remained free for consumers since its launch and every Indian will continue to make this instant digital without paying any transaction charge,” she reiterated.

She emphasized that financial inclusion and protecting small businesses remain priorities, ensuring consumers will not incur fees for their everyday, low-value transactions. The amendment provides the government with the legal authority to modify the existing zero-MDR framework that currently governs UPI and RuPay transactions, which prevents banks and payment system providers from imposing direct or indirect charges.