The Union government is mulling over the reinstatement of merchant charges for unified payment interface (UPI) transactions and RuPay debit cards, The Economic Times reported. The banking industry has proposed the fee for merchants with a GST-based annual turnover of more than Rs 40 lakh.
This fee, termed the Merchant Discount Rate (MDR), is a certain percentage of each transaction merchants must pay to banks and payment service providers (PSPs). While MDR for credit cards is fixed at 2% of a transaction, UPI and RuPay debit cards attract zero MDR due to government regulations. This move was part of an effort to increase the acceptance of digital payments, requiring the RBI and banks to bear their costs, considering the savings they would gain from handling less cash, the Finance Minister had claimed.
While UPI remains a popular choice for merchants, banks have increasingly raised concerns about zero MDR, noting that they still have to pay PSP fees to service providers like Google Pay, PhonePe, and Paytm, among others. Notably, banks have previously proposed the reintroduction of MDR alongside restructuring PSP, switching, and interchange fees.
Besides banks, card companies like Mastercard have criticized UPI’s zero MDR model, calling it an “incredibly painful experience for ecosystem participants who end up losing money as part of that proposition.”
Moving forward, the UPI interface recorded 16.10 billion transactions in February 2025, according to National Payments Corporation of India (NPCI) data. This move follows complaints from industry members about significant revenue losses due to UPI’s zero-cost model and the overall lack of incentives for banks to expand digital transactions.
Notably, budget allocations for UPI cost reimbursements have also declined from Rs 2,000 crore in FY24 (as per a revised estimate) to ₹437 crore in FY26. Additionally, banks and fintech firms are still awaiting UPI subsidies for the previous year, The Economic Times reported.
Besides MDR reintroduction, a tiered pricing model for UPI could also be introduced, wherein larger merchants would pay a higher charge than smaller ones, depending on their size, while ensuring that UPI transactions remain free for merchants with an annual turnover of less than Rs 40 lakh.
Speaking to MediaNama, Merchant Payments Alliance of India (MPAI) Chair, Harshvardhan Masta, noted that while transaction volumes could form a good way to categorise merchants, the government could increase the number of slabs through mechanisms like including progressive increments depending on business volumes.
In 2019, NPCI introduced a “P2PM” category comprising small merchants and the unorganised retail sector. This category, in addition to the pre-existing peer-to-peer (P2P) and merchant payment (P2M) categories, extended to merchants with UPI transactions of Rs 50,000 or less per month. Merchants in this latest category were charged zero MDR.
