'Tax maximisation' or a 'much-needed step'? Verdict split on UPI MDR

UPI MDR has sparked a debate among major fintech players, with some calling it necessary for sustainability while others question the cost burden on merchants and businesses

The introduction of a Merchant Discount Rate (MDR) on select UPI transactions has triggered a debate among leaders in the payment and fintech industry over the cost of running the network, its long-term sustainability and the burden on merchants.

 

While some industry executives have backed the move as necessary to create a sustainable revenue model for UPI, others have questioned the charge and raised concerns about how it will affect specific businesses.

 

The new framework will take effect from October 15. The National Payments Corporation of India (NPCI) has prescribed an MDR of 0.4 per cent on person-to-merchant (P2M) UPI transactions above ₹2,000, capped at ₹300 for transactions of ₹75,000 or more.

 

P2P transactions will remain free. P2M transactions up to ₹2,000 will also remain free, while small P2PM merchants receiving up to ₹1 lakh a month through UPI will not pay MDR. The fee will be distributed among participants in the payments chain rather than going to the government.

Who's against it?

Former BharatPe Managing Director Ashneer Grover has called the UPI MDR “a revenue maximisation strategy”.

 

“RBI surplus to Govt: ₹2.87 trillion. Total listed bank profits: ₹4.11 lakh crore. NPCI — which runs UPI pre-tax ‘surplus’: ₹1,888 crore,” Grover said in a post on X.

 

“Then whose loss is happening because of UPI and what subsidy is the government giving to UPI that is hurting?” he said.

 

Grover also questioned the need for a levy on UPI, citing the cost of India's cash infrastructure.

 

“Cost of running ATMs and cash logistics in India is ₹30,500 crore. If you want to optimise, shut ATMs and promote UPI instead,” he said.

 

“Any levy on UPI is just tax collection. UPI is the one scientific achievement of India everyone acknowledges, but now tax ki bali chadhegi,” Grover said.

 

He also questioned whether NPCI has the financial capacity to keep UPI free.

 

“Also NPCI, which runs UPI, has ₹6,119 crore hard cash on its balance sheet and pre-tax operating profit of ₹1,900 crore. NPCI can keep UPI free forever using its own cash and profits. The government has nothing to do with it. Government earned ₹1,000 crore tax from NPCI last year,” he claimed. 

Kamath backs MDR, but questions the structure

Zerodha founder and CEO Nithin Kamath has said he is not opposed to MDR but has questioned its application to broking.

 

“I think MDR on UPI was probably inevitable at some point, especially given how widespread UPI adoption has become,” Kamath said in a post on X.

 

“The problem with broking is that there is no guarantee that money transferred to a broker will actually result in a transaction,” he said.

 

“As brokers, we can’t force a customer to trade after transferring money. And if we can’t pass the UPI charge on to the customer, there is essentially no limit to the cost a customer can impose on a broker without generating any revenue,” Kamath said.

 

He said 10,000 customers could each make 50 UPI transfers of ₹2 lakh in a month without executing a trade. At the proposed MDR, this could potentially cost a broker around ₹2 crore without generating business, he said.

 

Kamath also raised the impact of quarterly settlement requirements, under which unused customer funds are returned and may subsequently be transferred back to broking accounts.

 

“Most customers then transfer these funds back to their broking accounts, with more than half of these transfers happening through UPI,” he said.

 

Kamath said a lower rate and cap would be more workable for broking.

 

“I think having an MDR is okay. It still doesn’t solve the problem of customers transferring money without transacting, but something like 0.02 per cent with a cap of ₹5 or ₹10 per transaction seems much more reasonable for broking, instead of a cap as high as ₹300,” he said. 

Who's for it?

The executives of several fintech companies have hailed the government’s move.

 

Walmart-owned PhonePe’s founder Sameer Nigam said the move was very important for the long-term growth and sustainability of the UPI ecosystem.

 

“It was needed to grow the UPI ecosystem. Fintechs and banks were bearing the charges for a lot of things from their own pockets, so major players were making losses. This move was much-needed,” he told Prasar Bharti.

 

MobiKwik co-founder Upasana Taku also called the move “a very positive step for India”, saying the cost of maintaining UPI infrastructure has increased with its adoption.

 

“But as UPI has grown, the cost of maintaining the infrastructure has also increased, and banks and payment companies have struggled to support those costs,” Taku told ANI.

 

She said the MDR would apply to large merchants and high-value transactions.

 

“For these large merchants, the UPI charge will be 0.4%, which is still much lower than the 1.6–1.8% typically charged for credit-card transactions,” Taku said.

 

Paytm founder and CEO Vijay Shekhar Sharma said that with this move, the UPI system has become “self-sustaining”.

 

“Until now, UPI has, in a way, operated on a grant-based system. It was like giving a driver a job but telling him to earn whatever he could through tips. Now, UPI has become self-sustaining,” Sharma told DD News.

 

“We can now stand on our own feet, make UPI self-reliant, and promote and expand its adoption even further,” he said.

 

Pine Labs CEO Amrish Rau said the MDR could give fintech companies a clearer route to monetisation.

 

“The introduction of MDR on UPI would materially change the narrative around fintechs. The sector has long been viewed as one where scale has been built without a clear path to monetisation,” Rau, in a post on X, said.

 

“A sustainable revenue model for UPI would alter that perception, improve investor sentiment and give the fintech ecosystem a significant boost,” he added. 

Merchants reluctant to absorb UPI MDR

The industry’s support for MDR is not matched by merchant willingness to absorb the proposed charge.

 

A LocalCircles survey of more than 32,000 merchants and businesses across 242 districts found that only 17 per cent were willing to bear an MDR of 0.4 per cent on UPI transactions above ₹2,000.

 

The survey found that 41 per cent of respondents would not bear any MDR, while another 9 per cent said they did not accept UPI payments. About 35 per cent were willing to bear an MDR of 0.1 per cent or more, while 25 per cent were willing to accept 0.25 per cent or more.

 

The survey also found that willingness fell as the MDR increased. Only 17 per cent were willing to accept the proposed 0.4 per cent rate.

 

An earlier LocalCircles survey found that 53 per cent of UPI users would move away from UPI for transactions above ₹3,000 if merchants passed on the MDR. Of these, 27 per cent said they would shift to credit cards, 14 per cent to debit cards and 12 per cent to cash or bank transfers.

 

However, NPCI has said the revised MDR framework is intended to create a sustainable revenue model for the UPI ecosystem while keeping it free for consumers. The proceeds will be distributed among participants in the payments chain, with the framework also providing for support to expand digital-payment acceptance among smaller merchants and underserved areas.