Govt Proposes Changes to UPI Zero-MDR Law
The Finance Ministry has proposed legal changes that could allow the government to reintroduce MDR on UPI transactions in the future.
SociapaHQ
The Finance Ministry has proposed amendments to the Payment and Settlement Systems Act, 2007, which could allow the government to re-introduce the Merchant Discount Rate (MDR) on Unified Payments Interface (UPI) transactions in future. But the proposal does not mean immediate charges for merchants or consumers.
The draft amendment aims to remove the existing legal provision that bars banks and payment service providers from charging MDR on some digital payment modes such as transactions through UPI and RuPay debit cards.
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Legal framework, not immediate charges:
If passed, the amendment would empower the government to decide, through future notifications, which electronic payment instruments would be exempted from charges for merchants and which may attract MDR.
At present, UPI and RuPay debit card transactions are covered under the zero-MDR regime that was rolled out in January 2020 to boost digital payment acceptance in the country.
Even if the amendment is passed, any move to impose MDR would require a separate government notification. The proposal therefore merely lays down the legal framework for such a move and does not change the current zero-charge rules.
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Debate over payment ecosystem sustainability:
The proposal comes as policy makers are still evaluating the long term viability of India’s rapidly growing digital payments ecosystem.
Banks, payment service providers and fintech companies have repeatedly said that the lack of MDR makes it difficult to recover infrastructure, processing and compliance costs associated with UPI transactions.
Earlier this year, the Parliamentary Standing Committee on Finance had highlighted the growing gap between the incentive support by the government and the actual cost of maintaining the zero-MDR ecosystem. The panel recommended looking into a more sustainable funding model for participants in the payments ecosystem.
The Union Budget FY2026-27 allocated ₹2,000 crore to support banks and other stakeholders processing eligible RuPay debit card and low-value BHIM-UPI transactions under the government's incentive scheme.
While UPI remains free for users and merchants at present, the proposed legal changes could provide the government with greater flexibility to revisit the pricing framework in the future if required.
