UPI: Should the new MDR be rolled back?

Ashok K Razdan

akrazdan6@gmail.com

India's Unified Payments Interface (UPI) has become one of the most important pillars of the country's digital economy. What began as a convenient alternative to cash has evolved into a mass payment infrastructure used by consumers, small businesses, large merchants and financial institutions.

The latest debate over UPI is therefore significant. The Government has introduced a new framework under which a 0.4% Merchant Discount Rate (MDR) will apply to specified person-to-merchant (P2M) transactions above ?2,000, while several categories will continue to remain free.

The issue is whether this limited charge should be rolled back or whether it is necessary to make the UPI ecosystem financially sustainable.

UPI has reached unprecedented scale and is hand picked financial instrument in the hands of common man and even downtrodden masses.

According to the National Payments Corporation of India (NPCI), UPI processed a record 24.51 billion transactions in August 2026, involving transactions worth approximately ?29.82 lakh crore.Its with pride that Transaction volume increased by about 22% over August 2025.

This demonstrates how deeply UPI has become embedded in everyday economic activity. From vegetable vendors and taxis to supermarkets, hospitals and government services, QR-based payments have become commonplace.

What has actually changed?

The new framework does not impose a transaction charge on ordinary citizens making person-to-person payments.

According to the reliable sources, all P2P UPI transactions will remain free. Merchant transactions up to ?2,000 will also remain free, as will transactions covered under the zero-MDR framework for small merchants. The Government estimates that approximately 96% of P2M transactions will remain unaffected.

For specified merchant transactions above ?2,000, an MDR of 0.4% will apply. The MDR is not a tax collected by the Government; it is distributed among participants in the payment ecosystem, including banks and payment service providers.

There are also special provisions. Transactions above ?2,000 in certain essential and thin-margin sectors such as railways, telecommunications, insurance, fuel and agricultural inputs will attract a flat MDR of ?5. Capital-market transactions have been assigned a lower rate of 0.02%, subject to a ?300 cap.

Main points for retaining the charge

The principal argument in favour of MDR is sustainability.

UPI operates on an enormous scale, requiring banks, payment applications, technology providers, cyber security systems, fraud-management infrastructure and network capacity. For several years, merchants using UPI have generally paid zero MDR, while the ecosystem has relied partly on Government support.

The Government had provided approximately ?8800 crore in incentive support during FY 2021-22 to FY 2024-25 to help sustain UPI services.

A carefully targeted MDR could therefore create a revenue stream for banks and payment-service providers without imposing a direct cost on ordinary consumers.

What are the concerns and why

There are, however, legitimate concerns about introducing charges into a system whose greatest strength has been simplicity and near-universal acceptance. Merchants may eventually attempt to pass the cost to customers, even though the Government has stated that MDR should not be passed on to consumers and that UPI applications cannot impose hidden charges. There is also a broader concern. UPI's success has been partly driven by the absence of friction. Even a small additional cost could influence the behaviour of some businesses, particularly those operating on thin margins.

Small merchants are especially important because UPI has helped bring millions of informal and small businesses into the digital payments ecosystem.

Should the charges be rolled back?

The answer depends on what objective policymakers want to prioritise.

A complete rollback would retain the original zero-cost model and eliminate concerns about merchants passing costs to consumers. However, it would also leave the question of how the rapidly expanding UPI infrastructure should be financed in the long term.

On the other hand, retaining a limited MDR provides a mechanism for sharing the cost of the payment infrastructure among ecosystem participants while protecting ordinary users and small merchants.

The Government's present framework attempts to follow this middle path: keep P2P payments free, protect small merchants and low-value transactions, and levy MDR only on specified higher-value merchant transactions which looks to be genuine one should be acceptable to all sections of society.

A possible middle path

Rather than viewing the issue simply as "charges versus no charges", policymakers could periodically review the MDR structure based on actual costs, merchant profitability and the financial health of banks and payment providers.

Transparency should be paramount. Merchants should clearly know whether an MDR applies, consumers should not be charged hidden fees, and the Government should publish periodic data showing how the system is performing.

There could also be a review mechanism under which MDR rates are reassessed after a specified period rather than becoming permanent automatically.

UPI must remain a public digital infrastructure

UPI is more than another payment application. It has become a major component of India's digital public infrastructure.

UPI with 24.51 billion transactions in August 2026 alone demonstrates the trust and CONVENIENCE that users have developed around it.

Therefore, the central policy objective should be to ensure that the introduction of MDR does not undermine the characteristics that made UPI successful: affordable and accessibility.

The present framework does not amount to a general charge on citizens. It is a targeted attempt to introduce an economic model for parts of the merchant ecosystem while keeping most transactions free.

Whether that model ultimately proves successful should be judged by evidence: transaction growth, merchant adoption, consumer behaviour.

The real question, therefore, may not be whether UPI should have charges at all, but how India can ensure that its world's-scale digital payment infrastructure remains both affordable for citizens and financially sustainable for the ecosystem that operates it.

The above discussion reflects the current September 2026 framework, including the Government's latest clarification that about 96% of merchant transactions remain unaffected.

The sources have said there is no plan to roll back the 0.4% MDR, with implementation scheduled from 15 October 2026.

(The author is former Ex Chairman RRB)