Govt May Bring Back Fee On UPI Payments For Large Merchants, Consumers Unaffected

Banks and payment system operators have been absorbing rising infrastructure costs as UPI transaction volumes have surged in recent years, prompting the government to explore a merchant discount rate (MDR) on payments made to large merchants, Moneycontrol reported, citing sources.

Point to note: MDR refers to the fee charged by banks and payment service providers to merchants whenever a customer makes a digital payment. It helps cover the cost of processing transactions, maintaining payment infrastructure, and settling funds.

The proposed fee could be set below 0.5% and would apply only to transactions above ₹2,000. The proposal is currently being considered by the government and a decision on the same is expected within two weeks, the report added.

Notably, the charge, if implemented, would apply only to large merchants and businesses, not consumers.

The proposal is not about charging individuals for UPI transactions, but centres on merchant-side economics and the long-term sustainability of the payments ecosystem. "There is a view that the model has to be commercially sustainable over time," a source cited by the publication said.

Separately, the Economic Times reported that the proposal under discussion is to levy MDR on merchants with an annual turnover of around ₹1 crore to ₹1.5 crore, applicable only on UPI transactions exceeding ₹2,000. The government may fix the MDR at 5 to 7 basis points if the proposal is approved, the report added.

The Payments Council of India had earlier recommended an MDR of 0.30% on UPI transactions undertaken by large merchants.

Nearly 90% of merchants accepting UPI payments fall within the small enterprise category and are expected to remain exempt from the fee.

While standard bank-to-bank UPI payments currently carry zero MDR for both consumers and merchants, an exception already exists for UPI payments made through RuPay credit cards. On such transactions, MDR applies once the payment exceeds ₹2,000.

A Policy Shift Since 2020

If implemented, the proposed MDR would mark a significant shift in policy. The government had removed MDR on UPI transactions in January 2020 to accelerate the adoption of digital payments.

The Centre currently offers incentives to banks and payment system operators for low-value UPI transactions of up to ₹2,000, under the "Incentive Scheme for Promotion of RuPay Debit Cards and Low-Value BHIM-UPI Transactions," launched in FY22 to support adoption of digital payments and financial inclusion.

The zero-MDR policy contributed to a sharp rise in UPI usage. According to the National Payments Corporation of India (NPCI), annual UPI transaction volumes have grown from about 20 million in FY17 to nearly 242 billion in FY26. Over the same period, total transaction value has risen from ₹0.07 lakh crore to around ₹314 lakh crore. In June alone, UPI processed 22.72 billion transactions worth ₹28.92 lakh crore.

Banks and payment companies have argued that processing such high transaction volumes without MDR has created a financial burden, as per ET. While the government has provided subsidies to compensate the industry, the allocation has reportedly fallen short of industry expectations in recent years.

A report by the Standing Committee on Finance, dated March 12, 2026, said the zero-MDR policy was introduced to keep digital transactions affordable and widely accessible, but cautioned that the absence of MDR has made the UPI ecosystem financially unsustainable. The committee recommended that the government consider a graded MDR structure for UPI transactions, while continuing targeted incentives such as cashback and subsidies to support digital payment adoption in smaller cities.

The committee also projected that UPI could expand tenfold in the coming years, supported by India's demographics, economic growth and geographic reach. It estimated the platform could add another 600 million users and process 100 to 150 billion transactions a month over the next five to seven years. "However, achieving this scale is challenged by the slowing growth momentum of UPI and the structural funding gap, which limits ecosystem investment in infrastructure, security, and merchant onboarding," the report said.