UPI to remain free for users; nominal MDR may apply to select merchant transactions
The Ministry of Finance clarified that UPI will remain completely free for consumers and for all person-to-person transactions, following speculation triggered by a legislative amendment enabling a Merchant Discount Rate (MDR) on UPI
The Taxation and Other Laws (Amendment) Bill, 2026 amends Section 10A of the Payment and Settlement Systems Act, 2007, replacing the blanket statutory ban on UPI/RuPay debit card MDR with a framework where the Central Government can notify by executive order which payment modes remain MDR-exempt
Any nominal MDR that is eventually notified would apply only to a limited set of large merchant transactions above a threshold, and is described as far lower than existing debit or credit card MDRs
The actual rate and threshold, if any, will be decided later by the UPI and Services Steering Committee headed by the National Payments Corporation of India (NPCI); no rate has been finalised as of this announcement
UPI and the Zero-MDR Policy
The Unified Payments Interface (UPI), launched by the National Payments Corporation of India (NPCI) in April 2016, enables real-time, 24x7 bank-to-bank fund transfers using a single-click two-factor authentication (device plus UPI PIN or biometric), built on top of NPCI's earlier Immediate Payment Service (IMPS) rail. Since January 2020, UPI and RuPay debit card transactions have carried zero Merchant Discount Rate (MDR) — the fee merchants pay their bank or payment aggregator for accepting digital payments — following the insertion of Section 10A into the Payment and Settlement Systems Act, 2007 and a parallel provision (Section 269SU) in the Income-tax Act, 1961, both aimed at accelerating digital payment adoption.
Key Details
- NPCI was incorporated in December 2008 as a not-for-profit company (Section 8 of the Companies Act, 2013, then Section 25 of the 1956 Act), jointly promoted by the Reserve Bank of India and the Indian Banks' Association
- The zero-MDR mandate stood unchanged for roughly six years (January 2020 to 2026) until the current amendment reopened the door to a notified, non-blanket MDR
- The Payment and Settlement Systems Act, 2007 designates the RBI as the sole regulator of all payment and settlement systems in India, exercised through the Payments Regulatory Board
The 2026 amendment does not itself impose an MDR — it removes the absolute statutory prohibition and hands the government (and subsequently NPCI's Steering Committee) discretion to notify a limited MDR, which is the legal mechanism behind this development.
Government Subsidy Schemes for Zero-MDR UPI
Because banks and payment service providers lose potential MDR revenue on UPI transactions, the government has separately compensated them through a budgeted Digital Payments Incentive Scheme, reimbursing banks for the zero-MDR shortfall on RuPay debit card and UPI person-to-merchant transactions. This incentive outlay has been declining sharply in recent budgets, which is part of the fiscal backdrop to reopening the MDR question.
Key Details
- Incentive scheme allocations: approximately ₹2,600 crore (FY2022-23), ₹2,485 crore (FY2023-24), ₹1,441 crore (FY2024-25), and a further reduction to about ₹437 crore (FY2025-26)
- Separately, the RBI's Payments Infrastructure Development Fund (PIDF), operationalised in January 2021 with an initial corpus of ₹345 crore, subsidised deployment of PoS and QR acceptance infrastructure in Tier-3 to Tier-6 centres, the Northeast, and Jammu & Kashmir; the scheme closed on 31 December 2025 after supporting roughly 4.77 crore digital payment touchpoints
- Estimated annual revenue loss to banks/payment service providers from zero-MDR UPI has been cited in the ₹5,000-6,000 crore range
The declining government incentive outlay, alongside the industry's persistent revenue-loss argument, forms part of the policy rationale for allowing a notified, narrowly-targeted MDR rather than continuing an open-ended government subsidy for zero-MDR UPI.
UPI's Scale and Global Expansion
UPI has grown into the world's largest real-time retail payments system by volume, and NPCI International Payments Ltd (NIPL) has been extending UPI-style acceptance infrastructure to multiple countries, reflecting UPI's role as a flagship Digital Public Infrastructure (DPI) export.
Key Details
- UPI processed a record 23.66 billion transactions worth ₹29.88 lakh crore in July 2026, up about 22% year-on-year in volume
- UPI acceptance is live in Bhutan, Nepal, Sri Lanka, Singapore, UAE, Mauritius, France, Qatar, and Cambodia, with MoUs signed for Cyprus, Oman, and Japan
- NIPL is also helping countries such as Peru, Namibia, and Trinidad and Tobago build their own UPI-like domestic real-time payment systems
The scale UPI has reached (nearly 24 billion transactions a month) is central to the fiscal argument for revisiting zero-MDR: at this volume, even a small notified MDR on a narrow band of high-value merchant transactions could meaningfully offset the infrastructure and incentive costs of running the system.
- UPI launched: April 2016, by NPCI; NPCI incorporated: December 2008 (RBI + Indian Banks' Association)
- Zero-MDR mandate on UPI/RuPay debit cards: in force since January 2020 (Section 10A, Payment and Settlement Systems Act, 2007)
- July 2026 UPI volume: 23.66 billion transactions worth ₹29.88 lakh crore — a record high, up ~22% year-on-year
- Digital Payments Incentive Scheme allocation: fell from ~₹2,600 crore (FY23) to ~₹437 crore (FY26)
- PIDF (RBI scheme for digital payment acceptance infrastructure): operational January 2021-December 2025, initial corpus ₹345 crore
- Decision-making body for any future MDR rate: UPI and Services Steering Committee, headed by NPCI
- UPI acceptance live in 9+ countries including Singapore, UAE, France, Sri Lanka, Nepal, Bhutan, Mauritius, Qatar, Cambodia