The amendment does not bring back Merchant Discount Rate (MDR) on UPI. Nor does it mean consumers or merchants will start paying charges immediately.
Instead, it changes the legal framework, giving the government the flexibility to decide in the future which digital payment modes should remain exempt from charges and which could attract MDR.
Here’s what the proposal actually means.UPI continues to remain free
For now, there is no change in how UPI works.
Users can continue making payments without any transaction fee, and merchants will not start paying MDR because of the proposed amendment alone.
The government has not notified any MDR rate, identified the transactions that could be covered, or announced a timeline for introducing charges.
What exactly is changing?
The proposal seeks to amend Section 10A of the Payment and Settlement Systems Act, 2007.
Currently, the law prevents banks and payment service providers from levying charges on notified payment modes such as UPI and RuPay debit cards.
The amendment would remove this blanket statutory protection. Instead, it would allow the government to notify which electronic payment modes will remain exempt from charges and which could attract MDR.
In effect, the proposal shifts the decision from being fixed in law to one that can be taken through government notifications.
Why make this change now?
The move comes as UPI has grown into one of the world’s largest digital payment systems.
In July alone, UPI processed 23.66 billion transactions worth ₹29.88 lakh crore, increasing the cost of maintaining the payments infrastructure for banks, payment service providers and other ecosystem participants.
Since MDR was removed in January 2020, the government has compensated participants through an incentive scheme. However, industry players have long argued that the incentives fall well short of the actual cost of processing transactions.
The issue was also flagged by the Parliamentary Standing Committee on Finance, which noted that the ₹2,000 crore allocated under the incentive scheme for 2026-27 covers only a fraction of the industry’s estimated costs and called for a more sustainable funding model.
The proposed amendment gives the government greater policy flexibility if it decides to revisit the current zero-MDR framework.
Does this mean MDR is certain to return?
No.
The amendment is an enabling provision, not a decision to levy MDR.
Even if Parliament approves the amendment, the government would still need to issue separate notifications specifying whether charges will apply, on which payment modes, for which transactions and at what rate.
Without those notifications, the status quo remains unchanged.
Who would pay if MDR returns?
MDR is a merchant fee, not a charge deducted from a customer’s bank account while making a UPI payment.
Merchants pay MDR to banks and payment service providers for processing digital transactions.
Whether merchants eventually absorb the cost or pass part of it on through prices is a separate commercial decision.
Could only some transactions attract MDR?
The government has not announced any such proposal.
However, industry discussions have suggested that any future MDR, if introduced, could be limited to higher-value merchant transactions while keeping small merchants and low-value payments exempt.
One industry estimate by Bernstein suggests that UPI transactions above ₹2,000 account for only about 4% of transaction volumes but nearly 70% of transaction value, making them a potential focus if the government ever revisits the pricing model.
These remain market assessments, not official government proposals.
