Opposition MPs raise concerns over proposed UPI merchant payment fee
A 0.4% Merchant Discount Rate (MDR) will apply to Person-to-Merchant (P2M) UPI transactions above ₹2,000 from October 15, 2026, ending nearly six years of a blanket zero-charge regime for UPI merchant payments
The fee is levied on merchants, not consumers; UPI remains free for all person-to-person transfers and for merchant transactions of ₹2,000 or below, which account for over 95% of UPI merchant payment volume
For high-value transactions, the fee is capped at ₹300 for transaction values of ₹75,000 and above, rather than scaling uncapped with the transaction amount
Concerns were raised in Parliament regarding the timing of the change, its effect on small and occasional merchants who cross the ₹2,000 threshold, and the rationale for departing from a policy in place since January 2020
The government stated that merchants cannot pass this charge on to customers, and that the resulting revenue is intended to support payment ecosystem participants and continued investment in digital payments infrastructure
What Is a Merchant Discount Rate (MDR)?
MDR is the fee a merchant pays to their bank, payment aggregator, or the payment network for the infrastructure that processes an electronic transaction. It is charged as a percentage of transaction value, deducted from the amount the merchant receives, and is economically distinct from any surcharge a platform might separately levy on the paying customer.
Key Details
- In a card transaction, MDR is typically shared between the issuing bank, the acquiring bank, and the card network (interchange fee is the largest component); UPI removed this cost structure entirely when MDR was set to zero
- The Reserve Bank of India (RBI) had earlier capped debit card MDR at 0.40% for transactions up to ₹2,000 and higher slabs (0.90–1%) for larger transactions — showing the ₹2,000 threshold has long been used as a differentiator in Indian payment-system regulation
- MDR revenue is the mechanism by which banks and payment service providers historically recovered the cost of payment infrastructure, fraud monitoring, and settlement risk
The new 0.4% UPI MDR mirrors the old debit-card MDR slab structure almost exactly, applying the same threshold and rate that once governed card payments — reintroducing a cost-recovery mechanism for UPI that had been absent since 2020.
The Zero-MDR Mandate and Its Legal Basis (2019–2020)
Zero-MDR on UPI and RuPay debit cards was not merely an industry practice — it was a statutory mandate. Section 10A was inserted into the Payment and Settlement Systems Act, 2007 by the Finance (No. 2) Act, 2019, barring banks and system providers from imposing any charge on specified electronic modes, read alongside Section 269SU of the Income-tax Act, 1961, which required businesses above a turnover threshold to offer these modes. The policy took effect from January 1, 2020.
Key Details
- Because zero-MDR meant banks and payment service providers earned no fee income from UPI transactions, the government separately ran a budget-funded Incentive Scheme reimbursing banks for processing zero-MDR BHIM-UPI P2M transactions
- A subsequent legislative change — the Taxation and Other Laws (Amendment) Act, 2026 — altered Section 10A's structure, replacing the automatic, uncapped zero-charge linkage with a provision letting the Centre specify by notification which payment modes (and up to what value) remain charge-free
- A Finance Ministry notification dated September 14, 2026 used this power to confirm that UPI transactions up to ₹2,000 and all RuPay debit card transactions remain charge-free, while leaving room for MDR above that threshold
The 0.4% MDR above ₹2,000 is possible only because of this 2026 legislative change to Section 10A — it converts what was an absolute statutory bar on any UPI charge into a threshold-based exemption, with the ₹2,000 notification defining exactly where the free tier ends.
Financing Digital Payments Infrastructure: Subsidy vs Fee-Based Models
A zero-fee payment system still has real operating costs — settlement systems, fraud prevention, customer support, and network capacity — which must be funded either through the government budget (subsidy) or through transaction fees (MDR). The 2026 change represents a partial shift from the former toward the latter for high-value merchant transactions.
Key Details
- Under the zero-MDR-plus-incentive-scheme model (2020–2026), the Union Budget allocated funds annually to reimburse banks for UPI/RuPay processing costs, a recurring fiscal commitment
- The new framework confines the free tier to transactions of ₹2,000 or below — covering the overwhelming majority of UPI merchant payments by volume — while shifting the cost of larger transactions to a merchant-borne fee instead of the budget
- This mirrors a broader global pattern in digital payments regulation, where low-value/retail transactions are kept free for financial-inclusion reasons while higher-value commercial transactions bear processing costs
The concerns raised centre on this shift in financing model — moving a portion of UPI's operating cost from the exchequer to merchants — and its distributional impact on small businesses that occasionally process transactions above ₹2,000.
- New MDR: 0.4% on P2M UPI transactions above ₹2,000, effective October 15, 2026
- Fee cap: ₹300 maximum, applicable to transactions of ₹75,000 and above
- Transactions of ₹2,000 or below (over 95% of UPI merchant payment volume) and all P2P transfers remain free
- Zero-MDR statutory mandate originated via Section 10A, Payment and Settlement Systems Act, 2007 (inserted by the Finance (No. 2) Act, 2019), effective January 1, 2020
- Pre-2020 RBI-capped debit card MDR: 0.40% for transactions up to ₹2,000; 0.90–1% for higher-value transactions
- Legal basis for the 2026 change: Taxation and Other Laws (Amendment) Act, 2026, amending Section 10A's structure
- Finance Ministry notification confirming the ₹2,000 free threshold and unrestricted RuPay debit card exemption: dated September 14, 2026