The government has amended the Payment and Settlement Systems Act to remove the legal ban on charging Merchant Discount Rate (MDR) fees on UPI transactions. This change creates an enabling framework for potential future charges, though it is not an immediate implementation. The government has clarified that UPI will continue to remain free for consumers and small merchants, with any future structure likely focused only on large-value business payments.
The central government has taken a significant legislative step by amending the Payment and Settlement Systems Act, officially removing the previous legal ban that prevented the imposition of a Merchant Discount Rate (MDR) on Unified Payments Interface (UPI) transactions. While this development has sparked industry conversation, it is important to understand that this is an enabling provision. This means it creates the legal framework for a fee to be charged in the future, but it does not represent an immediate implementation of a 0.3% fee or any other charge on current transactions.
Understanding the Legal Change
For the past six years, the UPI ecosystem has operated under a zero-MDR policy, which prohibited banks and payment service providers from charging merchants for processing UPI payments. By removing this barrier, the government has created the option to reintroduce fees for specific transaction types. The government and regulatory bodies have repeatedly emphasized that this change does not impact consumers or small businesses. The goal is to create a structure that could allow the payment ecosystem to address infrastructure costs while protecting everyday users and small-scale retailers from additional charges.
Why the Change is Under Discussion
The move stems from concerns regarding the sustainability of the digital payment infrastructure. A recent report by the Parliamentary Standing Committee on Finance highlighted the widening gap between the costs of maintaining UPI infrastructure and the resources currently available. Industry estimates suggested that annual operating costs for the UPI network reached approximately ₹20,700 crore, significantly exceeding the budgetary allocations provided to support the system.
Industry participants and stakeholders have argued that a zero-fee model places a heavy burden on banks and payment apps to fund cybersecurity, fraud prevention, and system upgrades. As transaction volumes grow, the need for consistent investment in these areas has become a central point of discussion. The proposal currently under consideration involves exploring a potential MDR—possibly in the range of 0.3% to 0.5%—specifically for high-value person-to-merchant (P2M) transactions over ₹2,000, and only for larger merchants.
Limited Impact on Daily Transactions
Data indicates that the impact of any such potential future fee would be highly targeted. Statistics from the previous fiscal year show that while billions of transactions are processed annually, the vast majority are person-to-person (P2P) transfers, which are expected to remain unaffected. Even among business-facing (P2M) transactions, only a small fraction—estimated at around 4%—typically exceeds the ₹2,000 threshold.
Moving forward, the National Payments Corporation of India (NPCI) and the relevant steering committees are expected to determine the structure, scope, and implementation timeline for any future fee models. Investors and market participants will likely monitor the specific details of these guidelines, as they will dictate how revenue is shared between issuing banks, acquiring banks, and fintech companies. Any eventual implementation would likely be gradual and focused on ensuring that the digital payment ecosystem remains robust and secure without discouraging widespread adoption.