The Finance Ministry has proposed repealing provisions under the Payment and Settlement Systems Act, paving the way for the government to levy Merchant Discount Rate (MDR) on large UPI merchants.
The proposed framework retains zero charges for retail consumers, while enabling the government to impose MDR only on eligible merchants through a Gazette notification after parliamentary approval.
A Parliamentary Standing Committee has warned that the zero MDR regime has made the UPI ecosystem financially unsustainable, with payment companies seeking a viable revenue model to support future infrastructure and network expansion.
Finance Ministry Seeks UPI Law Amendment, Opens Door for MDR on Big Merchants
The proposed amendment seeks to restore a Merchant Discount Rate on large UPI transactions while keeping digital payments free for consumers
Summary
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The Finance Ministry has proposed repealing the amendment to Section 10A of the Payment and Settlement Systems Act, 2007. The regulatory shift aims to levy a Merchant Discount Rate (MDR) on Unified Payments Interface (UPI) transactions for large merchants.
The proposed framework keeps the digital payment system entirely free for retail consumers. Once passed in Parliament, this will help the government issue a Gazette notification imposing MDR on UPI.
The legislative document outlines the exact operational changes, Moneycontrol reported.
"In clause 2 of the Bill, in the Payment and Settlement Systems Act, 2007, amendment of section 10A in order to remove the reference of provision of Income-tax Act and also to provide that no bank or system provider shall impose, whether directly or indirectly, any charge upon a person making or receiving a payment by using one or more electronic modes of payment as may be notified by the Central Government," the Bill said.
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Repealing Zero MDR Mandate
MDR functions as a mandatory processing fee paid by businesses to banks and payment service providers. The central government mandated zero MDR on UPI in January 2020. This policy aimed to accelerate digital payment adoption and financial inclusion across the country.
The strategy yielded massive scale. UPI currently accounts for 88 per cent of all digital transactions in India. The network processes over 23bn transactions monthly, handling financial volumes worth nearly Rs 30 lakh crore.
Financial Sustainability At Risk
A report by the Standing Committee on Finance, dated March 12, 2026, stated that zero MDR was introduced to make digital transactions affordable and widely accessible.
However, it warned that the policy has rendered the UPI ecosystem financially unsustainable.
The network continues to expand rapidly. The committee stated that UPI could expand tenfold in the coming years, supported by India’s demographics, economic growth and geographic reach.
It projected that the network could add 600mn new users and process between 100bn and 150bn transactions monthly in the coming years.
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During the last financial year, federal authorities did not release the allocated UPI subsidy.
Payment companies informed policymakers that they urgently require a sustainable revenue model to fund infrastructure upgrades and invest in the next phase of UPI growth.