India’s digital payments landscape may be heading towards a significant policy change. A Bill introduced in Parliament by the Ministry of Finance proposes amendments to the Payment and Settlement Systems Act, 2007, creating a legal framework that would enable the government to prescribe Merchant Discount Rate (MDR) for UPI and other electronic payment systems.

While the Bill does not impose any immediate charge on UPI transactions, it empowers the government to determine, through future notifications, which digital payment modes will continue to remain free and which may attract merchant fees.

The proposal marks an important shift from the current zero-MDR regime, under which UPI has grown into the world’s largest real-time retail payment system.

What is Merchant Discount Rate (MDR)?

Merchant Discount Rate (MDR) is the fee paid by a merchant to banks and payment service providers for processing digital payment transactions. It is generally expressed as a percentage of the transaction value.

Under the current proposal, the focus is not on charging individual UPI users, but on permitting MDR on specified merchant transactions, particularly those involving large businesses or high-value commercial payments.

Although no final rate has been announced, policy discussions have reportedly explored options such as:

• Applying MDR only above a specified transaction value.
• Levying MDR based on the merchant’s annual turnover.
• Combining both transaction-value and turnover-based criteria.

Why Has the Government Introduced This Bill?

The principal objective is to make India’s rapidly expanding digital payments ecosystem financially sustainable.

Since the introduction of the zero-MDR policy, banks, payment service providers, and infrastructure operators have processed billions of UPI transactions without earning MDR on many of them. As transaction volumes continue to grow, industry stakeholders have argued that a sustainable revenue model is necessary to support investments in technology, cybersecurity, innovation, and payment infrastructure.

At the same time, the government appears keen to preserve the affordability of digital payments for ordinary consumers and small businesses. Current indications suggest that any future MDR framework would primarily target large commercial merchants, while retail customers and small vendors may continue to enjoy free or minimal-cost UPI transactions.

Who Is Likely to Be Affected?

The proposed framework is expected to apply mainly to large merchants, including:

• Large retail chains
• E-commerce platforms
• High-volume commercial establishments
• Businesses exceeding prescribed annual turnover limits

Media reports have referred to various possible eligibility thresholds, including annual turnover exceeding ₹1 crore, ₹1.5 crore or even ₹50 crore, depending on the model under consideration. Similarly, MDR may apply only to transactions above a specified value, such as ₹2,000.

It is important to note that none of these thresholds has been officially notified. They remain part of ongoing policy discussions.

For consumers, the proposal is unlikely to result in direct charges on everyday UPI payments. However, businesses subject to MDR may eventually factor these costs into the pricing of goods or services.

What Happens Next?

The Bill provides only the enabling legal framework. It does not prescribe:

• MDR rates,
• categories of merchants,
• transaction thresholds, or
• the date from which any charges would become applicable.

These operational details will be determined through future government notifications and regulatory decisions after the legislation is enacted.

Therefore, the introduction of the Bill does not mean that UPI has become chargeable immediately. At present, UPI transactions continue to operate under the existing zero-MDR framework.

Key Takeaways

Aspect	Current Position	Proposed Change
UPI charges for consumers	No MDR	No immediate change
Merchant MDR	Zero for UPI	Government empowered to prescribe MDR in future
Target users	All users enjoy zero MDR	Likely focused on large merchants
MDR rates	Not applicable	To be notified separately
Effective date	Existing policy continues	Only after future notification

Implications for Banks

The proposed amendment could have several implications for the banking sector:

• A potential revenue stream for banks and payment service providers through merchant MDR.
• Greater financial sustainability of the digital payments ecosystem.
• Possible revisions to merchant acquiring agreements and pricing structures.
• Need to update payment systems, merchant onboarding processes, and customer communication once detailed regulations are issued.
• Continued emphasis on promoting digital payments while balancing infrastructure costs.

Conclusion

The proposed amendment to the Payment and Settlement Systems Act, 2007 represents a significant policy development in India’s digital payments ecosystem. Rather than introducing immediate charges on UPI, it seeks to provide the government with the legal authority to introduce a differentiated MDR framework in the future.

Based on current indications, any MDR is likely to be targeted at large merchants rather than individual consumers or small businesses. Until detailed rules are notified, UPI remains free for consumers, and the existing zero-MDR regime continues.

Banks, payment service providers, and merchants should nevertheless monitor future notifications closely, as the proposed legislation could reshape the economics of digital payments in India while seeking to balance affordability with the long-term sustainability of the UPI ecosystem.