BS Explainer: MDR on UPI, existing fee structures and what may change next

The Taxation and Other Laws (Amendment) Bill, 2026, could pave the way for an MDR on UPI. Here's how MDR works, the current structure and what may change

The Taxation and Other Laws (Amendment) Bill, 2026 was passed in the Lok Sabha on Thursday. The Bill amends the Payment and Settlement Systems Act, 2007, allowing the government to decide which digital payment methods remain free and which can attract charges. It replaces the current mechanism linked to the Income Tax Act, 2025, potentially paving the way for a merchant discount rate (MDR) on transactions made using the Unified Payments Interface (UPI).

 

However, an MDR on UPI is unlikely in the near term. Reserve Bank of India (RBI) Governor Sanjay Malhotra on Wednesday said discussions on the structure of a potential MDR for UPI are still premature, adding that continued investment is needed to further strengthen the real-time payments system.

 

What is MDR?

 

A merchant discount rate (MDR) is the fee a merchant pays to accept digital payments. It is charged as a percentage of the transaction value, while customers pay nothing extra. The fee is shared among the entities that facilitate the transaction.

 

MDR already applies to payment instruments such as debit and credit cards, with rates varying by instrument, merchant size and category. There is currently no charge for merchants for accepting payments on UPI platforms.

 

Is there an MDR on UPI already?

 

No. Since January 2020, merchants accepting payments through UPI have not paid any MDR.

 

Even after the passage of the Taxation and Other Laws (Amendment) Bill, 2026 in the Lok Sabha, the industry believes a merchant fee on UPI remains some time away. An MDR on UPI, which accounts for the majority of India’s digital payment transactions, would create a new revenue stream for companies to reinvest in and expand the payments ecosystem.

 

How is MDR structured?

 

Debit and credit cards have long operated with an MDR framework. The fee is shared among participants, including the bank that issued the customer’s card or holds the customer’s account, the card network that routes the transaction, and the acquiring bank or payment aggregator that onboarded the merchant and provided the acceptance device or payment gateway.

 

What are the existing MDR rates in India?

 

MDR ranges between 0.4 and 0.9 per cent of the transaction value for debit cards and 1.5 to 2 per cent for credit cards, while UPI transactions currently attract no MDR.

 

Industry estimates suggest an MDR on UPI could be 0.2-0.4 per cent, lower than that for debit and credit cards. The fee would likely be shared among the UPI platform, the acquiring bank, the payer’s bank, the payment aggregator and the network.

 

Estimates also suggest the MDR, if introduced, would apply only to large merchants for UPI transactions of around ₹2,000 and above.

 

Why is an MDR on UPI necessary?

 

An MDR on UPI would monetise transactions for the payments industry, improve profitability and could generate ₹5,000 crore to ₹10,000 crore by FY28.

 

At present, the Centre partly subsidises UPI transactions through annual budgetary allocations. However, the industry says the cost of operating and expanding the UPI ecosystem has outpaced government support in recent years.