Key Takeaway: The Indian government is actively considering reintroducing a Merchant Discount Rate (MDR) on UPI transactions of Rs 2,000 and above for large merchants with annual turnover exceeding Rs 1.5 crore. Small businesses and peer-to-peer transfers remain exempt. The proposed rate would not exceed 0.5%, and a final decision is expected within a month. This marks the most significant potential shift in India’s digital payments policy since MDR was scrapped in January 2020.
The End of Free UPI for Large Merchants?
India’s Unified Payments Interface (UPI) has been the envy of the digital payments world — free for users and merchants alike since the government scrapped the Merchant Discount Rate (MDR) in January 2020. Nearly six years and a 12,000-fold increase in transaction volumes later, the government is re-examining whether that policy remains sustainable.
According to reports published on July 16, 2026, the central government is actively considering a proposal to reintroduce MDR on UPI transactions for large merchants. The proposal represents the most significant potential change to India’s digital payments framework since UPI was launched.
What Is Being Proposed?
Based on reports from The Economic Times and other sources citing people familiar with the matter, the proposed framework includes:
- Threshold: MDR would apply only to UPI transactions of Rs 2,000 and above
- Rate: The fee would not exceed 0.5% of the transaction value
- Merchant turnover threshold: Only merchants with annual turnover of Rs 1 crore to Rs 1.5 crore would be covered
- Exemptions: Small businesses, peer-to-peer transfers, and transactions below Rs 2,000 would remain free
- Timeline: A final decision is expected within the next month
Why Reintroduce MDR Now?
The push for MDR revival comes from a combination of factors that have been building for years. The digital payments industry — led by the Payments Council of India — has repeatedly argued that the zero-MDR policy is financially unsustainable. Banks and payment service providers process UPI transactions without earning transaction fees, while bearing the costs of infrastructure maintenance, fraud prevention, and technology upgrades.
The government has attempted to bridge this gap through subsidies. In the current Union Budget, Rs 2,000 crore was allocated to compensate banks for offering UPI and RuPay debit card transactions without merchant charges. However, PCI has argued that this subsidy covers only around 11% of the industry’s costs and roughly 14% of the potential MDR revenue that could have been earned if merchant charges had been allowed.
The Parliamentary Standing Committee on Finance made a strong case for reviving MDR in a report published March 12, 2026. The committee stated that “establishing a viable revenue mechanism is critical to ensuring the UPI ecosystem achieves financial sustainability without perpetually straining the government exchequer.”
The Scale of UPI’s Growth
Understanding the MDR debate requires appreciating the sheer scale of UPI’s expansion. According to NPCI data:
- Annual transaction volume: 20 million in FY17 to 241.62 billion in FY26 — a 12,000-fold increase
- Transaction value: Rs 7,000 crore in FY17 to approximately Rs 314 lakh crore in FY26 — a 4,000-fold increase
- Only 4% of P2M transactions are above Rs 2,000, meaning the MDR would apply to a tiny fraction of overall volume
- 86% of P2M transactions are below Rs 500
The industry’s argument is that processing this massive volume at zero revenue is not viable in the long run, even with government subsidies.
Who Is Affected?
If the proposal is approved, the impact would be narrowly targeted. India has approximately 60 million merchants accepting digital payments, of which around 90% are small businesses with annual turnover under Rs 20 lakh. The MDR would apply only to the largest merchants — those with turnover exceeding Rs 1.5 crore — and only on individual transactions above Rs 2,000.
For context, a large retailer processing Rs 50 lakh in monthly UPI transactions above Rs 2,000 would face approximately Rs 25,000 in monthly MDR charges at the proposed 0.5% rate. Small shopkeepers, street vendors, and most regular merchants would be unaffected.
Comparison with Other Payment Methods
It is worth noting that UPI’s proposed MDR of up to 0.5% would still be significantly cheaper than other digital payment methods:
- Credit cards: MDR of approximately 2%
- Non-RuPay debit cards: MDR of approximately 0.9%
- UPI (proposed for large merchants): Up to 0.5%
- UPI (small merchants and P2P): 0% — remains free
What This Means for Digital Payments in India
The reintroduction of MDR for large merchants, if approved, would be a calibrated policy shift rather than a wholesale change. The government appears intent on preserving the core value proposition that made UPI successful — free digital payments for the masses — while creating a sustainable revenue model for the infrastructure that processes those payments.
The broader implication is that India’s digital payments ecosystem is maturing. Zero-fee models were essential for driving adoption, but long-term sustainability requires finding the right balance between accessibility and economics. For a system processing 242 billion transactions annually, even a small fee on a fraction of those transactions can fund significant infrastructure improvements.
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Frequently Asked Questions
What is the Merchant Discount Rate (MDR)?
MDR is a fee that merchants pay to banks and payment service providers for processing digital payment transactions. It is usually calculated as a small percentage of the transaction value and is shared among banks, payment networks, and payment companies involved in completing the transaction.
Will UPI become paid for regular users?
No. The proposal specifically exempts peer-to-peer transfers and small merchants. Only large merchants with annual turnover exceeding Rs 1.5 crore would be affected, and only on transactions above Rs 2,000.
What is the proposed MDR rate for UPI?
The proposed rate would not exceed 0.5% of the transaction value. This is lower than credit card MDR (~2%) and non-RuPay debit card MDR (~0.9%).
When would the new UPI MDR take effect?
A final decision is expected within a month. If approved, the government would need to notify the revised rules, after which implementation would begin. The exact timeline depends on the decision and subsequent notification.
Why did the government remove MDR in the first place?
The government scrapped MDR on UPI and RuPay debit card transactions in January 2020 to encourage digital payment adoption and expand merchant acceptance, particularly among small businesses. The policy was highly successful in driving adoption.
How much UPI transaction volume would be affected?
Only about 4% of person-to-merchant (P2M) UPI transactions are above Rs 2,000. Combined with the merchant turnover threshold, the actual number of affected transactions would be a small fraction of total UPI volume.
Related Reading
Sources
- The Economic Times, “UPI fees explained: Why the government plans to revive MDR and who will pay” (July 16, 2026)
- The Financial Express, “UPI above Rs 2,000 may attract 0.5% MDR for large traders” (July 16, 2026)
- News18, “UPI Charges May Return As Govt Weighs MDR for Large Businesses: Report” (July 16, 2026)
- Business Standard, “India’s fintech sector raises $2 bn in H1 2026, led by late-stage funding” (July 16, 2026)
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