UPI and the cost of policy reversal
A proposal under consideration would permit a Merchant Discount Rate (MDR) of 0.25–0.5% on UPI transactions above ₹2,000, primarily targeted at large merchants
The proposal reportedly draws on enabling provisions in a recent taxation amendment bill, which would create the legal framework for levying MDR on notified digital payment modes if implemented
Person-to-person UPI transfers are expected to remain free; the ₹2,000 threshold covers a small share of transaction volume but a large share of transaction value
The move would mark a departure from the zero-MDR policy that has applied to UPI and RuPay debit card transactions since January 2020
No final decision has reportedly been taken on the timing, structure, or implementation of any such charge
Merchant Discount Rate (MDR) and the Zero-MDR Mandate
MDR is the fee a merchant pays to banks, card networks, and payment service providers for processing a digital transaction — typically deducted from the settlement amount. Since January 1, 2020, MDR has been statutorily waived on UPI and RuPay debit card transactions in India, making these payment modes free for both merchants and customers.
Key Details
- The zero-MDR mandate flows from Section 269SU of the Income Tax Act, 1961 (inserted by the Finance Act (No. 2), 2019), which requires specified persons — businesses with annual turnover exceeding ₹50 crore — to offer prescribed electronic modes of payment (RuPay debit card, UPI, UPI QR code)
- CBDT Notification No. 105/2019 (dated December 30, 2019) prescribed these modes effective January 1, 2020, and barred any charge, including MDR, on transactions through them
- Non-compliance attracts a penalty of ₹5,000 per day under Section 271DB of the Income Tax Act
- Card-based payments (credit cards, non-RuPay debit cards) continue to attract MDR; only UPI and RuPay debit remained at zero MDR
The proposed 0.25–0.5% MDR on high-value UPI transactions would be the first formal rollback of the Section 269SU zero-MDR mandate for UPI, reversing a six-year-old policy stance that positioned free digital payments as an instrument of financial inclusion and formalisation.
Payments Infrastructure Development Fund (PIDF)
The zero-MDR policy created a funding gap for banks and payment service providers who bear infrastructure costs (QR codes, POS terminals) without earning MDR revenue. The RBI addressed this by setting up the Payments Infrastructure Development Fund in 2020 to subsidise the rollout of payment acceptance infrastructure, particularly in smaller towns.
Key Details
- PIDF was operationalised by the RBI in 2020 with an initial corpus of ₹345 crore (₹250 crore from RBI, ₹95 crore from card networks); the corpus has since grown beyond ₹1,000 crore
- It targets Tier-3 to Tier-6 centres and the North-Eastern states, offering 30–75% subsidy on the cost of PoS and digital PoS deployment
- It was set up for an initial three-year period from January 1, 2021, with provision for extension
The MDR debate is fundamentally about who bears the cost of UPI's payment rail — PIDF and government budgetary support (such as incentive schemes for banks processing low-value UPI transactions) have so far substituted for merchant-side MDR revenue; a reintroduced MDR would shift this cost back toward merchants.
Payment and Settlement Systems Act, 2007 and NPCI's Regulatory Architecture
The Payment and Settlement Systems Act, 2007 empowers the RBI to authorise, regulate, and supervise all payment systems in India, including large-value systems (RTGS) and retail systems (UPI, IMPS, card networks). The National Payments Corporation of India (NPCI), which operates UPI, was incorporated under this framework as a not-for-profit umbrella organisation promoted by the RBI and the Indian Banks' Association.
Key Details
- UPI was launched by NPCI on April 11, 2016, with 21 member banks, under RBI's regulatory oversight
- UPI processed over 24,000 crore transactions worth roughly ₹314 lakh crore in FY2025-26, and accounts for the large majority of India's retail digital payment volume
- Any change to MDR on UPI would require RBI/NPCI operational guidelines in addition to a change in the Income Tax Act framework under Section 269SU
Because UPI's zero-cost structure is embedded both in tax law (Section 269SU) and in NPCI's operating rules, reversing it would require coordinated changes across the regulatory and fiscal framework — explaining why the current move is described as an enabling proposal rather than an implemented charge.
- Zero-MDR on UPI and RuPay debit cards in effect since: January 1, 2020 (Section 269SU, Income Tax Act, 1961)
- Proposed MDR range under consideration: 0.25–0.5% on UPI transactions above ₹2,000
- UPI launch: April 11, 2016, by NPCI, with 21 member banks
- PIDF initial corpus: ₹345 crore (2020); grown to over ₹1,000 crore
- FY2025-26 UPI volume: approximately 24,162 crore transactions valued at ~₹314 lakh crore
- Penalty for non-compliance with Section 269SU: ₹5,000 per day (Section 271DB, Income Tax Act)