Proposed UPI Merchant Discount Rate Not A Tax, Cess Or Surcharge; Will Not Burden Consumers: FM

The proposed Merchant Discount Rate (MDR) on select high-value UPI transactions is neither a tax, cess nor a surcharge, and the collections will not accrue to the government, Finance Minister Nirmala Sitharaman said, rejecting criticism from Opposition parties.

The Finance Minister said the MDR is a charge within the digital payments ecosystem and is being levied by entities facilitating UPI transactions, including payment service providers, merchant's bank and other ecosystem participants.

"This is not a tax, this is not a cess, this is not even a surcharge. And the collection is not coming to the Consolidated Fund of India," Sitharaman told PTI.

Of the total MDR collected, it is proposed that 40% will go to customers' banks, 30% to the payment gateway, 20% to the UPI app and the remaining 10% to the sponsoring bank of the UPI app.

She assured that the MDR will not be passed on to consumers and will be borne within the merchant payment ecosystem.

The National Payments Corporation of India (NPCI) has announced a 0.4% MDR on specified person-to-merchant UPI transactions above ₹2,000 from October 15. Transactions up to ₹2,000 and person-to-person transfers will continue to remain free.

Sitharaman said the charge would be shared among multiple participants in the payment ecosystem to help maintain technology infrastructure and support improvements and innovation in digital payments.

"This is not at all anything to do with the government," she said, adding that the MDR mechanism involved NPCI, merchants, banks, aggregators and other service providers.

The Finance Minister also pointed out that merchants already pay MDR on transactions made through credit and debit cards, and said the new framework should not be viewed as a charge on consumers.

She further said that RuPay transactions would remain free and that no MDR would apply to UPI payments below ₹2,000.

It is estimated that approximately 96% of person-to-merchant UPI transactions will remain unaffected by the new framework.

The Finance Minister's remarks come amid criticism of the proposed MDR, with concerns being raised over its potential impact on merchants and the possibility of charges being passed on to consumers.

Effective October 15, a 0.4% MDR will be paid by merchants, not consumers, and the fee has been capped at ₹300 for transactions of ₹75,000 or more.

Payments between individuals, as well as the vast majority of everyday merchant payments, will remain free.

Essential services, such as railways, telecom, fuel and insurance, will attract a flat ₹5 fee per transaction above ₹2,000. Capital markets transactions (mutual funds, stockbroking) get a lower 0.02% rate, also capped at ₹300.

Small merchants collecting up to ₹1 lakh a month via UPI QR codes remain fully exempt from any new charge and shield about 96% of all merchant transactions.

The NPCI, which operates the UPI platform, on September 15, issued a circular providing for MDR on certain UPI transactions, with the move aimed at creating a sustainable revenue framework for the digital payments ecosystem.

A dedicated fund for promoting the use of UPI by small merchants will be set up, with a contribution of 5% of total MDR collections. This initiative will expand UPI acceptance, encourage sustained usage, and accelerate the inclusion of small businesses in India's digital payments ecosystem.