UPI MDR explained: What potential charges above Rs 2,000 payments on Paytm, GPay & other apps mean for you and merchants

The government has proposed changes to the Payment and Settlement Systems Act that could pave the way for a Merchant Discount Rate (MDR) on select UPI transactions, with payments above Rs 2,000 made to large merchants emerging as a possible focus.

The Payment and Settlement Systems (Amendment) Bill, introduced in Parliament by Finance Minister Nirmala Sitharaman, removes the linkage between the Payment and Settlement Systems Act and the Income Tax Act.

The change would give the Centre the power to notify which electronic payment modes will remain exempt from charges.


Also Read: Government moves closer to restoring MDR on UPI merchant payments

The proposed amendment does not itself introduce an MDR on UPI. The government is yet to finalise the rate, the merchants and transactions that would be covered, or when any charge would come into effect.

Here is what the changes mean, why the government is considering it and what it could mean for consumers, merchants and payment companies.

What is UPI MDR?

Merchant Discount Rate, or MDR, is the fee a merchant pays to banks and payment service providers for processing a digital payment.

MDR already applies to card payments. Credit card transactions can attract charges of up to around 3%, while debit card transactions can carry regulated MDR of up to 0.9%, depending on the transaction.

UPI transactions, however, currently carry no MDR for merchants.

Why is the government considering UPI MDR?

UPI has grown into one of the world's largest real-time payment systems, but banks, fintech companies and payment service providers do not earn an MDR from UPI transactions.

UPI processed around 23.7 billion transactions worth Rs 29.9 lakh crore in July, according to data released by the National Payments Corporation of India (NPCI).

The payments industry, as cited by a The Times of India report, has argued that maintaining such a large ecosystem requires continued investment in technology, cybersecurity and payment infrastructure. Bringing back MDR on selected transactions could give payment companies a direct revenue stream to support those investments.

UPI has been free of MDR for merchants since January 2020, when the government removed the charge to encourage digital payments.

What has the government proposed?

The proposed changes to the Payment and Settlement Systems Act would allow the Centre to decide which electronic payment modes should remain exempt from charges.

This is important for UPI because it could remove the legal barrier to imposing MDR on selected UPI transactions.

The amendment therefore creates the possibility of charging MDR; it does not mean that every UPI payment will now attract a fee.

Also Read: Jefferies sees Paytm, Pine Labs gaining from proposal to levy MDR on UPI transactions

The Economic Times had earlier reported on July 16 that the government was considering reintroducing MDR for UPI transactions undertaken by large merchants. At the time, sources had indicated that the Centre could set the fee at 5-7 basis points if MDR was reintroduced.

Will UPI payments above Rs 2,000 attract MDR?

A Rs 2,000 threshold is emerging as a possible basis for the new MDR framework, but it has not been finalised.

ET reported that brokerage Bernstein expects MDR, if reintroduced, to apply to large merchants and UPI transactions above Rs 2,000, with a possible fee of 30-40 basis points.

The Times of India reported that the government may allow an MDR of 0.25% to 0.4% on UPI payments above Rs 2,000 made to businesses, while person-to-person payments would remain outside the proposed framework.

Reuters separately reported that policymakers were considering an MDR of 0.3% to 0.5% on transactions exceeding Rs 2,000 for merchants with annual turnover above Rs 15 million.

The differing rates reported by the sources show that the final MDR structure is still under discussion. None of these rates should be treated as the final government-approved charge.

Why Rs 2,000 might be the proposed threshold?

The idea is to target a relatively small proportion of UPI transactions while covering a much larger share of the money moving through the system.

Bernstein estimates that transactions above Rs 2,000 account for around 4% of UPI transaction volumes but nearly 70% of transaction value.

A Jefferies report cited by the Times of India gave a similar estimate, saying transactions above Rs 2,000 account for 4% of merchant payment volumes but nearly 67% of total transaction value.

This makes higher-value merchant payments a potential starting point for monetising UPI without putting a charge on most everyday transactions.

Will small UPI payments remain free?

If the proposed threshold-based model is adopted, most everyday UPI transactions would remain outside the MDR.

The Rs 2,000 floor would cover 4% of all UPI transactions, leaving over 95% outside the proposed charge.

That would mean routine payments such as buying milk, vegetables and groceries, or paying an auto or taxi fare, are unlikely to be affected if the reported framework is adopted.

Person-to-person payments would also remain outside the proposed MDR framework.

However, the final government notification will determine which merchants and transactions are covered.

Will consumers have to pay the UPI MDR?

MDR is a merchant-side charge. It is paid by the business accepting the digital payment rather than directly by the customer making the UPI payment.

That does not necessarily mean consumers will see no impact.

Merchants could absorb the cost or pass some of it on to customers through prices. A government official cited by the Times of India said not all businesses would necessarily pass on the fee because the amount would be small.

The final impact on consumers will depend on the MDR rate and the rules eventually notified by the government.

How much revenue could UPI MDR generate?

The proposed change could create a significant new revenue pool for the payments industry.

Jefferies estimated that a framework covering transactions above Rs 2,000 could generate Rs 50 billion to Rs 100 billion in annual revenue for the payments industry, according to the Times of India.

ET reported that companies such as Paytm and Pine Labs could be among the potential beneficiaries.

For banks, fintech companies and payment service providers, MDR could provide a new source of revenue after years of operating UPI without a transaction-based merchant fee.

Could there be a cap on UPI MDR?

Industry representatives have suggested that the government could put a ceiling on the absolute amount charged as MDR.

An industry source cited by the Times of India said a cap could make sense because, unlike credit cards, UPI transactions do not involve a funding cost.

A cap would prevent the absolute fee from rising indefinitely with the size of a transaction if MDR is calculated as a percentage.

Whether such a ceiling is included will depend on the final framework.

Why was UPI MDR removed in 2020?

UPI has been free of MDR for merchants since January 2020, when the government removed the charge to encourage digital payments.

The move helped make UPI a low-cost payment option and contributed to its rapid adoption among consumers and businesses.

But as UPI volumes have expanded, payment companies and banks have continued to incur costs related to technology, cybersecurity and infrastructure without earning a conventional merchant fee on UPI transactions.

The proposed MDR framework is therefore aimed at creating a potential revenue stream while keeping most everyday UPI payments outside the charge.

What does the Bill mean for UPI users?

The key point is that UPI is not becoming chargeable immediately.

The proposed amendment creates the legal framework for the government to allow charges on selected electronic payment modes. It does not set a final UPI MDR rate or automatically impose a fee on payments above Rs 2,000.

The government still needs to decide the MDR rate, transaction threshold, merchant eligibility, possible turnover criteria, whether there will be a cap and which transactions will remain exempt.

For now, the proposal points towards a possible system in which large merchants pay MDR on higher-value UPI transactions, while consumers, small businesses and person-to-person payments remain largely outside the charge.

The final rules will determine whether that becomes the new structure for India's UPI payments ecosystem.