India to Reintroduce MDR on UPI Merchant Payments — Ending the Zero-Fee Experiment for Transactions Above ₹2,000

Summary

India is preparing to reintroduce a Merchant Discount Rate (MDR) on UPI merchant transactions — a landmark shift from the blanket zero-MDR regime in place since January 2020. The Department of Financial Services is expected to issue a gazette notification within about two weeks defining which digital payment channels remain exempt, and proposals under discussion would charge MDR of roughly 0.3-0.5% on merchant transactions of ₹2,000 and above at larger merchants. Consumer P2P payments and low-value retail transactions will remain free, and Finance Minister Nirmala Sitharaman has said merchants will not be allowed to pass the charge on to customers.

Key Facts

UPI merchant transactions of ₹2,000+ could attract MDR within the next ~two weeks
Legal basis: Parliament passed the Taxation and Other Laws (Amendment) Bill 2026, amending the Payment and Settlement Systems Act to let the government designate exempt channels while allowing MDR on commercial transactions
Proposals under discussion: MDR of 0.3-0.5% on higher-value merchant transactions at big businesses
Zero-MDR regime has been in place since January 2020; prior to that UPI carried charges up to ~0.3%
Consumers P2P and low-value retail UPI payments remain free; Sitharaman says merchants cannot pass MDR to customers
Transactions above ₹2,000 account for only ~4% of merchant-payment volumes but ~67% of their value (Jefferies)
Could generate up to ~$1 billion in revenue for banks and payment companies
UPI scale: 23.6B transactions worth ₹29.87 lakh crore ($313.5B) in July alone; 24,162 crore transactions worth ₹314.23 lakh crore in FY26 (Grant Thornton, 60.9% CAGR)
RBI Gov Malhotra: "Someone will have to pay the cost" of the system
UPI used by 550M+ people; 11 countries outside India
BBC analysis: merchant acceptance drove UPI growth; a fee reaching small merchants could slow expansion
~70% of UPI volume via PhonePe and Google Pay (79.5% volume / 82.7% value, May)
75% of users say they'd stop using UPI if fees were introduced (2024 LocalCircles survey)

Why It Matters

Reintroducing MDR is the biggest economic test India's digital-payments miracle has faced: after a decade of free, ubiquitous UPI, the government is testing whether it can make the rail financially sustainable (recovering infrastructure, fraud and security costs) without eroding the merchant network that drove its scale. The design (thresholds, nominal rates, protecting small merchants and consumers) will determine whether India can restore "commercial sanity" to UPI — and whether the world's biggest real-time payment system can be monetized without losing its frictionless advantage.

Summary

Key Facts

Why It Matters

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