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The government may soon notify a framework for levying a merchant discount rate (MDR) on select Unified Payments Interface (UPI) transactions, with the fee potentially set at around 40 basis points (bps), or 0.4% of the transaction value. According to an Economic Times report, issuing banks could receive 40% of the MDR, while the remaining fee could be divided equally between third-party application providers (TPAPs), such as PhonePe and Paytm, and acquiring banks, with each receiving 30%. At an MDR of 40 bps, this would translate into around 16 bps for the issuing bank and 12 bps each for the TPAP and acquiring bank. The framework is yet to be formally notified, and the final MDR, transaction threshold, and merchant eligibility criteria could change. The notification detailing the proposed fee is expected in the coming weeks, the report said, citing sources. The NPCI is reportedly working on the modalities of the framework. Inc42 has reached out to NPCI for a comment on the proposed MDR framework. The story will be updated upon receiving a response. The development comes weeks after Parliament cleared amendments to the Payment and Settlement Systems Act, 2007, paving the way for the Centre to notify which electronic payment modes would continue to remain exempt from MDR. Finance Minister Nirmala Sitharaman had maintained that the amendment itself does not impose an MDR and that no final MDR framework has yet been decided. Notably, the reported 40 bps MDR is significantly higher than the 0.05%-0.07% rate that had emerged in earlier discussions around a targeted UPI fee. Last month, it was reported that the government was considering an MDR of 5-7 bps on UPI transactions above ₹2,000 for businesses with annual turnover of around ₹1 Cr-₹1.5 Cr or more, and there may be differential fees for businesses across sectors. The proposal was also expected to include different fee structures for businesses across sectors. The government has indicated that any MDR introduced on UPI would be nominal and restricted to a limited set of merchant transactions above a specified threshold. The finance ministry has also clarified that consumers would not be charged for making UPI payments and that person-to-person transactions would remain free. Why UPI MDR Is Back On The Table The debate over MDR has resurfaced as UPI has grown into India’s dominant digital payments system, while banks and payment companies continue to depend heavily on government incentives to cover the cost of processing transactions. UPI transactions reached 24.51 Bn worth ₹29.82 lakh crore in August, marking a 20% annual growth. The zero-MDR regime was introduced in 2020 to accelerate the adoption of digital payments. Instead of allowing banks and payment companies to charge merchants, the government introduced an incentive scheme to compensate ecosystem participants for processing low-value UPI and RuPay transactions. However, a parliamentary finance committee said that the incentive mechanism does not adequately cover the costs incurred by banks and payment companies in maintaining the payments infrastructure. The government’s incentive outlay for UPI and RuPay transactions peaked at ₹3,631 Cr in FY24. The initial budgetary allocation subsequently fell sharply, with ₹437 Cr earmarked for FY26 before the government revised the allocation upwards. This has widened the gap between UPI’s transaction growth and its monetisation. While the payments system accounts for a significant share of payment aggregator volumes, much of this activity generates little or no direct transaction revenue for the companies processing it.
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