The Central government has proposed changes to the Payment and Settlement Systems Act that could pave the way for Merchant Discount Rate (MDR) on certain Unified Payments Interface (UPI) transactions in the future. However, no fee has been approved yet, and UPI payments will continue to remain free under the current system.
Finance Minister Nirmala Sitharaman introduced the Taxation and Other Laws (Amendment) Bill, 2026 in Parliament on Tuesday. The Bill seeks to amend the Payment and Settlement Systems Act, 2007, along with the Income-tax Act, 2025, and the Finance Act, 2026.
Bill creates legal framework for future MDR
The proposed amendment removes the existing provision that prevents banks and payment service providers from charging Merchant Discount Rate on notified digital payment methods.
This does not mean MDR has been reintroduced immediately. Instead, the amendment gives the government the legal authority to decide later whether to levy merchant charges, on which payment modes, and at what rate.
Government sources have indicated that no final decision has been taken on the rate or the categories of transactions that could attract MDR.
Large merchants may be affected
According to reports, one proposal under discussion is to levy an MDR of 0.3 to 0.5 percent on UPI transactions above Rs 2,000. Another proposal is to determine the fee based on a merchant’s annual turnover rather than the value of individual transactions.
Officials are also considering limiting any future charges to large businesses, while keeping small merchants exempt. Consumers are not expected to pay any additional fee if MDR is introduced, as the charge would be borne by merchants.
Why is MDR being considered?
Merchant Discount Rate is a fee paid by businesses to banks and payment service providers for processing digital payments. While merchants already pay MDR on credit and debit card transactions, UPI has remained free since January 2020 to encourage digital payments.
Payment companies and banks have argued that the zero-MDR policy has made it difficult to build a sustainable business model. They say additional revenue is needed to invest in payment infrastructure, cybersecurity, technology upgrades and innovation.
Earlier this year, a Parliamentary Standing Committee also described the zero-MDR framework as financially unsustainable in the long term and recommended creating a sustainable funding mechanism for the UPI ecosystem.
UPI continues to grow rapidly
The proposal comes as UPI continues to record massive growth. In July alone, the platform processed around 23.7 billion transactions worth nearly Rs 29.9 lakh crore, making it one of the world’s largest real-time digital payment systems.
According to industry estimates, transactions above Rs 2,000 account for only a small share of total merchant UPI payments by volume but contribute a significant portion of the total value. Analysts believe that introducing MDR only for this segment could generate between Rs 5,000 crore and Rs 10,000 crore annually for the digital payments industry.
For now, the proposed amendment only creates the legal framework. The government has not announced any merchant charges, the applicable rate, or a timeline for implementing MDR. Until such a decision is notified, UPI transactions will continue to remain free for users.
