A new report from IIT Bombay suggests that the proposed 0.4% Merchant Discount Rate on large UPI transactions could hurt consumer trust and digital payment growth. With the NPCI considering a delay in the October 15, 2026 implementation, the outcome may affect how millions of Indians and merchants handle digital payments.
A research report from the Indian Institute of Technology (IIT) Bombay has cautioned that the proposed Merchant Discount Rate (MDR) framework for Unified Payments Interface (UPI) transactions may negatively affect public trust. The report highlights that the introduction of fees on digital transactions could reverse the rapid adoption of UPI, which has become a primary method for small-value and essential payments across the country.
The core of the discussion involves a proposed 0.4 percent fee on person-to-merchant (P2M) transactions exceeding ₹2,000, with a cap set at ₹300 for payments of ₹75,000 and above. While the goal of the National Payments Corporation of India (NPCI) is to build a sustainable revenue model for payment service providers, the IIT Bombay study argues that such charges should be implemented carefully to avoid discouraging users.
To address these concerns, the researchers have suggested a more focused approach. They recommend limiting fee collection to larger merchants with an annual turnover of over ₹50 crore. According to the report, this method could capture a significant portion of the expected revenue while protecting smaller vendors and the general public from additional costs. The study also calls for exempting essential sectors like railway ticketing, fuel, and insurance, as well as loan EMI repayments, from these charges to maintain financial inclusion.
Market expectations are currently focused on the implementation timeline. While the NPCI had initially aimed for an October 15, 2026 rollout, reports indicate that the authority is considering deferring the date to January 1, 2027. This potential delay stems from industry feedback regarding operational readiness and the possible impact on the festive shopping season, which typically sees high volumes of digital payments.
For the broader payment ecosystem, the risk lies in potential cost pass-throughs. If merchants face higher operational costs, there is a possibility that some may pass these expenses to consumers, either through convenience fees or by limiting UPI acceptance for specific transactions. This could lead to a shift in consumer behavior, potentially slowing down the transition toward digital payments. Additionally, the distinction between transactions—where those under ₹2,000 and person-to-person transfers remain free—is designed to protect the average user, but market participants are tracking whether the fee structure might still cause friction in daily digital commerce.
The next important updates will be the official decision from the NPCI regarding the implementation date and the final structure of the fee exemptions. Industry stakeholders are also monitoring how the Reserve Bank of India, which oversees the payment infrastructure under the Payment and Settlement Systems Act, manages the balance between service provider sustainability and widespread digital adoption.