UPI MDR may return for large merchants: What it means for your digital payments

The UPI has transformed the way Indians make digital payments, with users and merchants enjoying free transactions under the government's zero Merchant Discount Rate (MDR) policy. While peer-to-peer transfers and small merchants continue to remain free, the government is now considering bringing back a small MDR for large retailers, as per a report from the Economic Times.

If the charge is reinstated for major retailers, the government will probably set the MDR on UPI transactions at 5-7 basis points, according to the report. A business completing a transaction of Rs 10,000 would only have to pay Rs 5-7 at 5-7 basis points, the report quoting a source said. Even though it is a minor fee, it will be important since it may allow the sector to generate income from core payments.

Here's what the MDR is, why it matters, and how the proposed change could impact India's digital payments ecosystem.

For regular UPI transactions, the MDR is now 0%. Peer-to-peer transfers and small merchants are still free.

What is the MDR?

The MDR is a fee that merchants and other businesses must pay to a payment processing company on debit or credit card transactions. The MDR typically comes in the form of a percentage of the transaction amount.

Why is the government considering a fee for large merchants?

Although the government pledged to compensate the industry through incentive programmes, reimbursements have decreased annually. According to industry officials, the lack of the MDR has left banks and fintech companies without a viable UPI business model.

Mehul Mistry, SVP, customer success, strategy & growth, Zeta, explains, “For banks, PSPs and payment infrastructure providers who have absorbed processing costs for years without direct monetisation, this could unlock a sustainable revenue model, potentially generating Rs 3,500–5,000 crore annually, well above what the government previously spent subsidising the ecosystem. Crucially, small merchants and P2P transactions stay untouched, so the inclusion gains of the last five years aren't at risk."

Mistry explains, "This could be the most consequential shift in India's digital payments landscape since the zero-MDR mandate in 2020. While the proposed 5–7 bps MDR would apply to only 2–4% of merchants, those above Rs 1–1.5 crore in annual turnover, this segment drives an outsized share of the UPI's merchant transaction value.
The Payments Council of India, the industry body for payment companies, has through multiple representations requested the government to consider bringing back the MDR.

The Parliamentary standing committee on finance made a strong case in March for bringing back the MDR for large merchants. The potential move would mark a significant shift in India's digital payments policy, six years after transaction charges were scrapped.

In a report published on March 12, the panel said, “The committee would like to emphasise that establishing a viable revenue mechanism is critical to ensuring the UPI ecosystem achieves financial sustainability without perpetually straining the government exchequer.”