The Indian government has introduced legislative amendments that lay the groundwork for reintroducing a Merchant Discount Rate (MDR) on Unified Payments Interface (UPI) and RuPay debit card payments, but only for large businesses. This strategic move is designed to create a sustainable revenue model for the country’s rapidly expanding digital payments ecosystem, without passing costs on to consumers or small merchants .
What’s Changing and Why?
The central legislative change is an amendment to Section 10A of the Payment and Settlement Systems Act, 2007. Since January 2020, the government has mandated a “zero MDR” framework for UPI and RuPay debit cards to promote digital adoption . While this policy successfully propelled India to become a global leader in digital payments—with UPI processing over 2,200 crore transactions monthly in July 2026—it has created a significant financial challenge for the industry .
A report from the Parliamentary Standing Committee on Finance in March 2026 noted that the “absence of MDR makes the UPI ecosystem financially unsustainable” . The current government incentive scheme, which offers a 0.15% subsidy on low-value transactions (up to Rs 2,000), covers only about 11% of the industry’s costs and a fraction of the potential revenue if MDR were permitted . With transaction volumes soaring, banks and payment service providers have been left without a viable core business model, leading to concerns about continued investment in infrastructure and technology .
The proposed Taxation and Other Laws (Amendment) Bill, 2026, removes the rigid zero-MDR mandate and empowers the government to decide which payment modes and which merchants will attract fees .
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Who Will Pay and How Much?
Based on the government’s proposal, the charges are designed to be highly targeted to avoid disrupting the broad adoption of digital payments.
- Who Bears the Cost? The MDR is a processing fee paid by businesses to banks and payment service providers for accepting digital payments . It is not a charge on consumers. For the everyday user, UPI transactions for personal payments will remain completely free .
- Which Merchants Are Targeted? The fee is primarily intended for large commercial entities and e-commerce platforms with an annual turnover exceeding Rs 50 crore . This would include major players like Amazon and Flipkart .
- Who Is Exempt? Small merchants and neighbourhood vendors with an annual turnover of up to Rs 1.5 crore will remain fully exempt from MDR charges . This threshold-based structure protects the backbone of India’s retail economy.
- What Are the Proposed Rates? The final rates are still under discussion, but multiple sources indicate the fee will be modest. Reports suggest a cap of 0.3% to 0.5% of the transaction value for large merchants . Another proposal suggests the fee might be applied only to transactions above Rs 2,000, as these high-value transactions account for a significant share of the total payment value . This is far lower than the roughly 1-3% MDR typically charged on credit card transactions .
The Bigger Picture
The amendment is a significant step toward ensuring the long-term financial health of India’s digital payment infrastructure. By creating a self-funding mechanism, the government aims to address the industry’s pain point of monetization without burdening consumers or small businesses. This move is expected to provide a significant boost to banks and fintech firms, allowing them to continue investing in the security, reliability, and scale of the ecosystem
