Govt May Restore MDR On High-Value UPI Transactions

The government is considering restoring the merchant discount rate (MDR) on certain high-value UPI transactions or introducing a tiered incentive structure to gradually reduce government support for the digital payments ecosystem.

This move is being examined by the Department of Financial Services (DFS) in view of the sustainability of the Unified Payments Interface (UPI) ecosystem and the burden on the government exchequer. The department is looking into the feasibility of restoring MDR for certain high-threshold transactions or merchants and a tiered incentive structure that would phase out government support over the next few years.

The Parliamentary Standing Committee on Finance recently noted that the government has allocated Rs 2,000 crore to incentivise UPI transactions and compensate for losses arising from zero-MDR transactions. However, the committee pointed out that this amount is significantly lower than the industry's estimated operational cost of Rs 20,700 crore.

The committee expressed concerns that inadequate compensation could affect critical investments in cybersecurity, fraud prevention, and payment network infrastructure. UPI transactions have carried zero MDR since January 2020, when the government abolished the charge to accelerate digital payments and encourage a shift from cash to electronic transactions.

Before the abolition of MDR, an MDR of up to 0.30 per cent applied to UPI merchant transactions. The committee also noted that UPI is expected to process as many as 150 billion transactions a month and add 600 million new users. The current government incentive covers around 11 per cent of the industry's actual costs and 14 per cent of potential MDR collections.

The Parliament recently passed the Taxation and Other Laws (Amendment) Bill, 2026, which amended the Payment and Settlement Systems Act, 2007, allowing the government to specify electronic payment modes that may continue to receive statutory protection from charges. However, the government has not yet permitted the levy of MDR on UPI transactions.

The potential reintroduction of MDR on high-value UPI transactions or the introduction of a tiered incentive structure could have significant implications for the digital payments ecosystem in India. It could affect the way merchants and consumers use UPI transactions, and it could also impact the investments made by payment companies in cybersecurity and infrastructure.

The government's move to reduce its support for the digital payments ecosystem is likely driven by the need to manage its expenses and ensure the sustainability of the UPI ecosystem. The decision to reintroduce MDR or introduce a tiered incentive structure will depend on various factors, including the feedback from stakeholders and the impact on the digital payments ecosystem.

In conclusion, the government's consideration of restoring MDR on high-value UPI transactions or introducing a tiered incentive structure is a significant development in the digital payments space. It highlights the need for a sustainable and efficient digital payments ecosystem that can support the growing number of transactions and users in India.

The move is expected to have a significant impact on the digital payments industry, and it will be important to monitor the developments in this space. The government's decision will depend on various factors, and it will be crucial to ensure that the digital payments ecosystem remains sustainable and efficient.

The potential reintroduction of MDR on high-value UPI transactions or the introduction of a tiered incentive structure is a complex issue that requires careful consideration. The government will need to balance the need to reduce its expenses with the need to ensure the sustainability of the UPI ecosystem.

The decision will have significant implications for the digital payments industry, and it will be important to monitor the developments in this space. The government's move is likely to be watched closely by stakeholders, including payment companies, merchants, and consumers.

In the end, the government's decision will depend on various factors, including the feedback from stakeholders and the impact on the digital payments ecosystem. The potential reintroduction of MDR on high-value UPI transactions or the introduction of a tiered incentive structure is a significant development in the digital payments space, and it will be important to monitor the developments in this space.