Finance Ministry moves to enable MDR on UPI, proposes scrapping zero MDR provision

The Finance Ministry has reportedly proposed a key legislative change that could pave the way for reintroducing Merchant Discount Rate (MDR) on Unified Payments Interface (UPI) transactions for large merchants, marking the first formal step towards creating a sustainable revenue model for India's fast-growing digital payments ecosystem.

Reports say, as part of amendments to the Payment and Settlement Systems Act, 2007, the government has proposed removing provisions that currently prevent banks and payment system providers from levying MDR on notified electronic payment modes.

Once Parliament approves the amendment, the Centre will be empowered to issue a notification specifying the transactions on which MDR can be charged. The proposal does not envisage any fee for consumers using UPI, with the burden, if introduced, expected to fall only on merchants.

The move comes more than six years after the government abolished MDR on UPI and RuPay debit card transactions from January 2020 to accelerate digital payments.

The policy helped drive unprecedented adoption, with UPI now accounting for nearly 88% of all digital transactions in the country. The platform currently processes more than 23 billion transactions worth close to ₹30 lakh crore every month.

Parliamentary Standing Committee’s view on zero-MDR model

The proposal also aligns with concerns raised by the Parliamentary Standing Committee on Finance, which in its March 2026 report described the zero-MDR framework as financially unsustainable in the long run.

While acknowledging that the policy played a crucial role in making digital payments affordable and expanding financial inclusion, the committee said the absence of a viable revenue stream has constrained banks and payment service providers from investing in innovation, cybersecurity and infrastructure needed to support the next phase of UPI growth.

The committee noted that UPI has the potential to expand nearly tenfold over the coming years, supported by India's favourable demographics, economic growth and wider geographic reach.

It projected that the platform could add another 600 million users and process 100-150 billion transactions every month, but cautioned that such a scale would require continuous investments in technology, resilience and merchant acceptance infrastructure, which cannot rely indefinitely on government incentives alone.

It recommended developing a sustainable funding mechanism that balances affordability for users with the long-term viability of ecosystem participants.